Monday, February 22, 2010

Want An Independent Assessment Of The Malaysian Economy? Try The IMF

I stumbled across the IMF’s latest country report on Malaysia the other day while culling my email. Article IV consultations are conducted with all IMF member states on a regular basis – read this article on the background of IMF surveillance. A summary of the report is available here, if you don’t want to wade through the entire 60-page report.

Interesting reading even if its a bit dated, particularly in the differences in assessing policy between IMF and Malaysian authorities (Treasury and BNM). I’d particular point out pages 15-23, which covers future policy paths (liberalisation, private investment, reducing oil revenue dependency, abolishing subsidies, and fiscal consolidation), and a very interesting box article on page 21 which assesses BNM’s exchange rate intervention post-2005 (summary: it was two-sided, and not intended to force a particular exchange rate level).

Also of interest is a projection of the public sector debt path from pages 3-5 of the Informational Annexe (72% of GDP by 2014).

Not surprisingly, the biggest area of disagreement is on the level of the exchange rate. With the IMF’s three-prong statistical methodology, the Ringgit is considered undervalued though not extremely so, but the policy approach was “broadly appropriate”. Malaysia’s rebuttal is on pages 35-36, which is echoed by the IMF executive director for Malaysia’s statement at the end of the document (pgs 6-7). Here’s an interesting, and highly pertinent, quote from the latter:

“Secondly, while the current account surplus is sizeable, Malaysia is a commodity producer.  Over two-thirds of the current account surplus can be attributed to commodities including oil.  It is fundamentally inappropriate to apply the 3-model CGER estimations when an economy is a significant producer of non-renewable resources.  A Fund working paper by Thomas, Kim and Aslam (2008) estimated that by applying an alternative methodology for assessing the external balance in countries with large stocks of non-renewable resources, the non-oil current account position for Malaysia was in fact in equilibrium, as oil resources can be expected to be depleted in the future.  Our authorities would also welcome accelerated work on the commodity-based CGER approaches that we understand is being undertaken at the Fund. “

Technical Notes:

“Malaysia: 2009 Article IV Consultation - Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Malaysia”, International Monetary Fund, August 2009

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