IMF sees 6.5% growth for Malaysia this year

In its country report, it said growth was projected to rebound to 6.5% this year, underpinned by a strong recovery in manufacturing and construction, and supported by the rollout of the Covid-19 vaccination in February.

“The recovery would be uneven across sectors, with persistent weakness in high-contact industries. On the demand side, government spending and a recovery in both domestic and external demand would underpin growth, ” it said.

The findings were based on a report prepared by the IMF staff team for the fund’s executive board’s consideration on Feb 22,2021.

The report was prepared after discussions that ended on Dec 15,2020, with the officials of Malaysia on economic developments and policies. The staff report was completed on Feb 3,2021.

In the report, the IMF also came out in support for the government’s various moves by implementing policies that buttress the recovery while facilitating the post-pandemic economic transformation.

According to the report, the IMF expected Malaysia’s current account surplus to decline to 3% of gross domestic product (GDP), as demand for pandemic-related equipment recedes and the rebound in domestic demand raises imports.

It also said that travel balance deficit would persist as international travel restrictions continue through the first half of this year.

“Inflation would recover to 2% as electricity tariff rebates expire and energy prices rise. Over the medium term, growth would converge to 5%, inflation stabilise at 2%, and the current account surplus return to its downward pre-pandemic path, ” it said.

However, it cautioned the recovery could be derailed if the pandemic intensifies or due to other risks.

The current pandemic wave, it cautioned, could be protracted or could be followed by another severe wave, prompting the authorities to lengthen the duration of the movement restrictions.

In such a situation, it said these factors would intensify the supply-side constraints on economic activity and further dampen domestic demand. In this case, the recovery in 2021 would be significantly weaker.

It also noted that on the downside, Malaysia’s highly open economy was vulnerable to escalating trade actions and weaker-than-expected growth among its trading partners.

The IMF said that going forward, policies that strengthen social safety nets and continue to encourage private investment can help facilitate external rebalancing.

As for Malaysia’s external debt, it remains high but manageable. External debt rose to 67.5% of GDP by end-September 2020 (63.4% in 2019), partly driven by higher non-resident holdings of ringgit-denominated debt instruments.

“The share of external debt denominated in foreign currency stands at about two-thirds of the total, which is low relative to peers, ” it said.

On the government’s various policies to buttress the recovery, the IMF noted that synchronous monetary, financial and fiscal policy support helped prevent worse economic outcomes to date.

“Targeted fiscal support should continue until the recovery takes hold, with reliance on accommodative monetary and financial policies given fiscal space at risk. Fiscal reform plans should be prepared to return to fiscal consolidation over the medium term.

“Governance and other structural reforms should continue to support the economic transformation impelled by the pandemic and technological change, ” it said.

The IMF also said that under an adverse scenario of a protracted pandemic, the authorities would need to raise health spending and use scarce fiscal resources to provide additional targeted support to the economy, particularly to households facing prolonged unemployment.

It said these measures would need to be appropriately calibrated as a complement to additional monetary and financial easing, where wider policy space remains, to overcome a larger downturn.

Additional spending could be financed with borrowing under the Covid-19 fund, utilising available space under the parliament-approved ceiling of RM65bil.

On the country’s public debt, the IMF said it remains sustainable but the temporary increase in the statutory debt limit underscores the need to improve the fiscal framework.