2014 IMF Article IV Report on Malaysia

It’s out, and available here. The summary is per the link below (excerpt):

Favorable Prospects for Malaysia’s Diversified Economy

• Growth likely to remain healthy in 2015, despite lower energy prices
• End of fuel subsidies and start of Goods and Services tax is timely, and good for efficiency, equity, and the environment
• Exchange rate flexibility will help non-energy exports

After a year of very strong growth of 6 percent, lower energy export prices in 2015 will likely contribute to growth moderating to a still impressive rate of close to 5 percent, say IMF economists.

In their annual report on the health of the Malaysian economy, the report’s authors say growth is expected to moderate to about 4¾ percent this year while headline inflation will likely increase slightly to about 3¼ percent in 2015 as a result of an end to fuel subsidies, the introduction of a Goods and Services Tax (GST), and exchange rate depreciation.

Inflationary pressures are expected to remain subdued, helped by lower oil and gas prices. Activity will be led by consumption and growth in private investment in the non-oil sector, which is likely to benefit from lower energy costs and higher prices of non-commodity exports.

Private consumption growth is likely to moderate, reflecting the net effects of lower commodity prices, the impact of the new GST, and slower credit growth, as financial conditions tighten, but remain accommodative. The report’s authors added that the current macroeconomic policy mix was appropriate….

There’s a “selected issues” annexe, which covers:

• The impact of the drop in oil prices: modestly negative for Malaysia and with some crucial differentiation depending on the type of price shock;
• Fiscal policy, focusing on three issues – GST, fuel subsidies, and strengthening fiscal institutions.
  • GST – a nice roundup of international best practice and how Malaysia’s implementation compares (the standard rate of 6% is too low and there are too many zero-rated items, but the threshold of RM500k is appropriate)
  • Fuel subsidy removal – these were well-timed (60% of subsidies went to the top 40%, while only 3% reached the bottom 10%). The IMF also noted the need to account for negative externalities, which we haven’t done (i.e. they think petrol and diesel should be subject to GST).
  • Fiscal sustainability – expects the debt to GDP ratio to fall to 45%-50% by 2019, but with risks of rising to 70% under adverse shocks. Large external debt and foreign holdings of domestic debt are risks. The Fiscal Policy Office (under Treasury) needs to be beefed up, with an eye towards public disclosure, while a medium term fiscal risk strategy and disclosure (including but not limited to contingent liabilities) is recommended.

Technical Notes:

1. Press Release
2. Article IV Consultation Staff Report
3. Selected Issues Paper