KUALA LUMPUR: The Malaysian economy continues to perform well despite external headwinds, the International Monetary Fund (IMF) said.
The IMF commended the government for the resilient economic performance over recent years, noting that growth was solid without signs of inflationary pressures.
The country’s economic growth had averaged above five per cent over the past five years, leading to higher per capita income and reducing already low poverty.
“Economic growth is now moderating, and is estimated at 4.7 per cent in 2018, underpinned by robust domestic and external demand,” the IMF said in its report after concluding its annual discussions with the government officials on Malaysia’s economic development and policies.
The fund concluded that Malaysia’s financial sector appeared resilient with sound profitability and liquidity indicators and low non-performing loans, and supported the broadly neutral monetary policy stance.
It agreed with Malaysia’s planned gradual pace of fiscal consolidation in 2019 and over the medium term to support debt reduction and strengthened fiscal buffers.
The IMF pointed that Malaysia’s headline inflation had dropped from an average of 3.7 per cent in 2017 to an estimated one per cent in 2018 as domestic fuel price adjustment was suspended, the Goods and Services Tax (GST) was zero-rated and replaced by the narrower-base Sales and Service Tax, and food price inflation declined.
The credit-to-gross domestic product (GDP) ratio was declining, while on the external side, the current account surplus was estimated at 2.2 per cent of GDP in 2018, the fund said.
The account surplus had gradually narrowed in recent years as growth drivers had shifted towards domestic demand, itadded.
The IMF expects Malaysia’s GDP growth to stabilise this year and over the medium term, with inflation picking up and the current account surplus continuing to narrow.
“Domestic demand will remain the main driver of growth. Given Malaysia’s position in global value chains, the US tariffs on
imports from China could reduce Malaysia’s growth rate by 0.2 percentage points in 2019 via traditional trade channels and through financial and confidence effects, despite some trade diversion.”
The IMF added that while public investment will contribute negatively to growth in the near term due to the ongoing review of infrastructure projects, private consumption and investment were expected to be robust, underpinned by an improved business environment and greater confidence.
The latter factors are expected to counterbalance the negative drag from the external environment and fiscal consolidation, leaving growth flat at 4.7 per cent in 2019.
Inflation should rise above two per cent in 2019, as the effect of the GST removal dissipates, and oil subsidies become targeted.
“Over the medium term, growth is expected to converge to potential (4.8 per cent) and inflation will remain subdued,” it added.
Meanwhile, the IMF said the government had disagreed with its recommendation to phase out the differentiated real estate property gain (RPGT) and floor price for non-residents’ purchase of properties.
The government viewed that the measures remain relevant to ensure that growth in house prices were reflective of domestic fundamentals.
Recent data from 2017 and the first half of 2018 has indicated some resurgence in the growth of investment property purchases by non-residents.
In this regard, the government believes the measures were still considered appropriate to manage risks arising from the build-up of financial imbalances in the property market, which could spill over to the domestic financial system.
The IMF said Malaysia’s household debt was elevated compared to regional peers, but declining.
“Total household debt stood at 83.2 per cent of GDP as of the third quarter of 2018. High household financial assets (twice the size of total household debt) help mitigate the vulnerability for all but the lowest income group (with income below RM 3,000 per month).
“Households in the second income group (earning between RM3,000 and RM5,000 per month) would face the largest cash flow shortages under income, interest rate, or cost-of-living shocks, according to Bank Negara Malaysia stress tests,” the fund added.