March 2, 2020 @ 11:47am
KUALA LUMPUR: The International Monetary Fund (IMF) expects Malaysia’s growth to remain stable in 2020 before rebounding in the medium term, with inflation slightly higher and the current account declining.
The forecast was made by the IMF executive board on February 7 after concluding its annual consultation with Malaysia.
The fund said domestic demand would be the main driver of the country’s growth, with stable employment and income growth supporting private consumption.
“Private investment will gradually pick up as the business environment continues to improve and external uncertainties dissipate,” the IMF said in a statement late last week.
The fund expects Malaysia’s headline inflation to increase to slightly over 2.0 per cent as domestic demand rises, the base effect of the consumption tax regime change vanishes and fuel subsidies become targeted.
The current account surplus is expected to narrow to 2.7 per cent of gross domestic product (GDP) as capital imports resume.
“Over the medium term, growth should converge to potential (just below 5.0 per cent) and inflation remains under control, while the current account surplus continues to moderate,” it added.
Meanwhile, the IMF said risks to the growth outlook were, on balance, to the downside, citing that Malaysia’s highly open economy was vulnerable to escalating trade actions and weaker-than-expected trading partners’ growth.
“An abrupt deterioration in market sentiment towards emerging markets could lead to tighter financial conditions.
“However, a durable truce that may follow the recent signature of the phase-one deal between the US and China is an upside risk,” it added.
Domestically, the IMF said contingent liabilities could pose fiscal risks.
A sharp drop in real estate prices or a deterioration in household debt service ability could affect growth and financial stability, while domestic policy uncertainty could reduce investment.
The IMF said its executive directors felt that the Malaysian economy had been stable despite internal and external challenges, while recognising the progress made on the reform agenda and encouraged the authorities to remain committed to governance and structural reforms.
To address the risks facing the economy, the directors recommended that policy priorities ahead should continue to focus on a medium-term fiscal consolidation plan, while safeguarding growth and financial stability.
“Directors welcomed the planned pace of fiscal consolidation and encouraged the authorities to identify well-defined spending and revenue measures to support this adjustment, including in the context of the upcoming medium-term revenue strategy preparation,” the IMF said.
The directors also encouraged the authorities to push ahead with the adoption of a Fiscal Responsibility Act, and with plans to improve debt management, public procurement, and the public investment framework.
The IMF said Malaysia’s financial sector was stable, and that profitability, capitalisation and asset quality of banks were sound.
However, it noted that household debt was high compared to peers, with pockets of vulnerability among lower-income groups.
“Directors advised the authorities to closely monitor risks in the real estate and household sectors. Further enhancing the macro-prudential toolkit would be helpful.
“Directors commended the ongoing efforts to strengthen financial literacy and manage cyber risks and climate change risks to the financial sector,” it added