Tuesday, February 14, 2012

IMF’s Article IV Consultation With Malaysia: Points To Ponder

This is for policy wonks only! OK, it’s mainly for policy wonks, as there’s some interesting stuff for the layman to look at, if you have the patience to get through some of the jargon.

Starting with the summary page:

Malaysia: Staff Report for the 2011 Article IV Consultation


Near-term outlook. Economic activity is expected to moderate as the weaker external environment tempers exports, private investment and consumption growth. This is expected to lower inflation, but will make the 2012 budget deficit target difficult to achieve. General elections, expected by analysts in early 2012, may add to market volatility.

Managing the spillovers from downside external risks. Given its integration with the rest of the world, the economy is vulnerable to a prolonged downturn in advanced economies or a sharp escalation in global financial stress. Weaker exports and terms of trade would spill over into domestic demand. Financial spillovers could include a reversal of cross˗border bank and portfolio flows. Healthy financial and corporate balance sheets, ample foreign exchange reserves, and room to further loosen monetary policy would help contain the impact of an external shock on the financial sector and the economy. The room for fiscal policy to respond is, however, more limited given elevated federal government debt levels.

Ensuring sustained and more inclusive growth. Raising potential growth will require sustained efforts to raise the skills of the workforce, facilitate greater competition in product markets, and implement structural fiscal reforms. To make growth more inclusive, this will need to be complemented with investments in social safety nets. Given the limited fiscal room over the medium term, social spending will need to be better targeted to the needy, although an unemployment insurance scheme and expanded pension provision could be designed without a large fiscal cost.

…which gives the IMF’s view in a nutshell. Note that if you read through the “Authorities’ Views” (starting on page 8), there’s no real disagreement with this assessment, except on the subject of the fiscal deficit (page 9).

Now the nuggets:

  1. Social safety nets and inclusive growth. This is something the IMF has previously largely ignored for developing countries, but with income inequality on the global political agenda, they’ve come round to becoming advocates – there’s a whole section of the report dedicated to inclusive growth (pgs 18-22), dealing with subjects as diverse as the minimum wage, the ETP, household borrowing, subsidy rationalisation and the real exchange rate. On the minimum wage, there’s a footnote that states that the median minimum wage level in the OECD is around 40% of the average wage, which in the Malaysian context would be at about RM800.
  2. Household debt. The IMF thinks the measures taken so far have been effective and appropriate, except for unsecured personal loans. There’s a nice cluster of charts on page 5, contrasting Malaysia’s household debt position relative to other countries (and I love the heatmap for asset price and corporate imbalances – it confirms my intuition regarding corporate deleveraging over the past decade). Where I think they got it slightly off is attributing much of this to banks – it’s the non-banks that are really the worry.
  3. External Debt. The Information Annex at the back begins with a medium term debt sustainability analysis, with estimates of the sensitivity of debt to various types of shocks (I did say this was for policy wonks).
  4. Government Debt. Also mentioned in the debt analysis is the IMF’s projections for government debt – they think it will rise to 61% of GDP by 2016 under their baseline scenario, and a combination of 1/4 std dev shocks away from the baseline could push it up as high as 70% of GDP. Their recommendation is that fiscal consolidation isn’t going far enough or fast enough, and suggest looking at fast tracking GST and subsidy rationalisation. Nevertheless, if growth risks increase this year, they think the government ought to maintain spending even if revenue falls. What’s interesting here is the response (emphasis added):

    The authorities were confident of meeting the 2012 deficit target even if growth is lower than expected. Given conservative revenue assumptions, they remain optimistic that federal government debt can be kept below 55 percent of GDP in 2012 and over the medium term, based on a deficit path targeting a 3 percent of GDP deficit by 2015. Nevertheless, they would view a temporary rise in federal government debt above this threshold as acceptable to support growth under exceptional circumstances if downside risks to growth materialize. Otherwise, they will ensure that the debt-to- GDP ratio does not exceed 55 percent.

    There's a chart on pg 18 that show how far apart the two sides are.
  5. External Vulnerability. There’s an elasticity estimate of Malaysia’s sensitivity to global growth (about 1.2%), as well as an assessment of Malaysia’s vulnerability to Europe through the banking channel (Box 2 on page 13 and charts on page 26).
  6. Monetary Policy. There’s a nice chart at the bottom of page 23 that shows policy rates versus a Taylor Rule – Malaysia’s almost right on the money (now, to figure out what version of the Taylor Rule BNM is using!)

One last item: right at the start, on page 3, there’s a throwaway statement on the output gap – they think it’s closed. With unemployment at multi-year lows and capacity utilisation at pre-recession levels, that has some interesting implications for public and private sector investment this year and next.

Technical Notes:

Malaysia: Staff Report for the 2011 Article IV Consultation, International Monetary Fund Country Report No. 12/43, February 2012

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