Malaysia growth momentum slowing: IMF
WASHINGTON: Malaysia’s growth momentum is slowing, albeit from a high base in 2022. Advanced estimates indicate 3.4 percent growth for 2023Q4, down from 8.7 percent in 2022. Growth is estimated at about 4 percent in 2023, driven by robust domestic demand, as exports weakened markedly due to the economic slowdown in major trading partners, the International Monetary Front, said in a report.
Disinflation is taking hold, with average inflation falling to 2.5 percent in 2023, down from 3.4 percent in 2022. Malaysia’s strong macroeconomic policy frameworks, including a track record of fiscal prudence and a credible monetary policy framework, have served the country well and have become more important as it undergoes important structural reforms. A history of costly and untargeted spending on subsidies is coming to an end, the IMF executive board said after concluding its Article IV Consultation with Malaysia.
Macro policies have appropriately tightened. Bank Negara Malaysia (BNM) had increased the overnight policy rate (OPR) five times since May 2022 by a total of 125 bps to its pre-pandemic level of 3.0 percent. The OPR remained unchanged since May 2023 with the monetary policy stance currently broadly neutral. The 2023 Budget deficit target is expected to be met. The 2024 Budget appropriately charts the near-term consolidation path, targeting a decline in the overall deficit from 5 percent of GDP in 2023 to 4.3 percent in 2024, and down to less than 3 percent of GDP by 2026.
Resilient domestically driven growth and upside risks to inflation define the near-term outlook. Growth is projected to slightly accelerate to 4.3 percent in 2024, supported by resilient private consumption and investment and a rebound in public spending. Inflation is projected to pick up to 2.9 percent in 2024, pending uncertainty around subsidy reform. Over the medium term, the current account surplus is expected to widen, as tourism recovers and improves the services balance.
Executive directors welcomed Malaysia’s economic resilience, underpinned by strong fundamentals and the authorities’ sound policymaking. Noting downside risks to the growth outlook and upside risks to inflation, Directors agreed that near-term macroeconomic policies should focus on preserving price stability and rebuilding buffers, while structural reforms should support medium-term growth and the path to high-income status.
Directors welcomed the recent enactment of the Public Finance and Fiscal Responsibility Act 2023 and the authorities’ planned fiscal consolidation, which would help rebuild buffers. To support the consolidation path as well as the country’s development and social needs, Directors called for credible and durable revenue mobilization measures and for spending prioritization. In this context, they encouraged the authorities to continue implementing the subsidy reform and to consider reintroducing the Goods and Services Tax, which can help finance pro-poor spending, thereby offsetting its regressivity effects. Directors generally agreed that the central bank’s broadly neutral, data-dependent monetary policy stance will help safeguard price stability. They cautioned against prematurely cutting policy rates, noting upside risks to inflation. Directors welcomed the central bank’s measures to further develop FX markets and concurred that exchange rate flexibility and reserve adequacy should be preserved.
Directors welcomed the financial sector’s soundness and the authorities’ commitment to safeguard financial stability. They encouraged the authorities to continue monitoring highly leveraged households and small firms, and welcomed the updates to stresstest design to better capture emerging risks. Directors also encouraged the authorities to consider expanding, as needed, the macroprudential toolkit in a preventive manner. They welcomed the strengthening of AML/CFT frameworks and called for continued efforts on this front, the report added.