KUALA LUMPUR: Malaysia's growth momentum is expected to sustain to end 4.7 per cent higher this year and 4.9 per cent next year, driven by resilient domestic demand and a recovery in external demand, according to ASEAN+3 Macroeconomic Research Office (AMRO).
This is compared with its downgrade of 2024 economic growth forecast for the Asean+3 region to 4.2 per cent from 4.4 per cent.
AMRO in its its 2024 Annual Consultation Report said although inflation has moderated, it is subject to upside risks from fuel subsidy rationalisation.
"The authorities should be prepared to tighten monetary policy to contain any second-round effects on inflation from the adjustment in fuel prices."
"Restoring medium-term fiscal space, building up foreign reserves, and accelerating structural reforms will help foster further economic resilience and raise potential growth," it said in the report.
The report was based on AMRO's Annual Consultation Visit to Malaysia in July 2024, and data and information available up to August 16.
Economic developments and outlook
The report highlighted that the 4.7 per cent growth is supported by strong domestic demand and strengthening export recovery amid the global technology upcycle.
It said the unemployment rate dropped to pre-pandemic level and labour force participation has soared to a record high. "The policy rate has remained unchanged since May 2023 amid easing inflation and improving demand conditions. Headline and core inflation declined steadily in 2023, while planned subsidy rationalisation has been gradually rolled out."
"With diesel prices successfully floated in June, attention now turns to the planned subsidy rationalisation of RON95 fuel. Its potential inflationary impact would depend on the phasing of the adjustment," it said.
As for fiscal deficit, the report said it could narrow further this year and in 2025, but it will be challenging to meet the government's medium-term deficit target of 3.5 percent of GDP in the absence of new revenue measures.
Risk, vulnerabilities, and challengesRisks to the growth outlook are broadly balanced in the near term. It said downside risks arise from weaker-than-expected growth in major economies and adverse spillovers from the U.S. presidential election.
"Upside risks include faster implementation of investment projects. Commodity price shocks and uncertainty about the timing and quantum of RON95 subsidy rationalisation are key risks for inflation."
"Over the medium term, escalating tensions between the U.S. and China could lead to global economic fracturing, with ramifications on Malaysia's trade and investment," it said.
Other challenges include a lack of skilled talent, which could hinder industrial upgrading; inadequate retirement savings amid an aging population; and low preparedness for natural disasters and climate change.
Policy recommendations
The report suggested for monetary policy calibration to take a data-dependent approach.
The emergence of second-round effects on inflation from fuel subsidy rationalisation would warrant a tightening of monetary policy.
"Although exchange rate flexibility should be maintained as a shock absorber, foreign exchange interventions may be needed in the event of excessive volatility. "Strong external buffers are required for such interventions to be effective," it said.
It added the government's continued fiscal consolidation should be supported by subsidy rationalisation and tax reforms.
A phased implementation of RON95 subsidy rationalisation with effective communication is recommended to avoid a large inflation shock and allow for policy impact assessment.
"To achieve the medium-term fiscal target, the government should consider reintroducing the goods and services tax after the full implementation of e-invoicing."
"Following the enactment of the Public Finance and Fiscal Responsibility Act, the planned Government Procurement Act should be expedited to further strengthen governance, accountability, and transparency," it said.