SINGAPORE, May 31, 2019 – The Malaysian economy proved resilient to escalations in U.S.-China trade tensions and domestic commodity supply disruptions in 2018, expanding by 4.7 percent on the back of robust private consumption. Growth is expected to inch lower at 4.6 percent in 2019 and at around the same level in 2020, reflecting the ongoing fiscal consolidation and headwinds arising from the slowdown of the global electronics cycle, lower crude oil prices, and uncertainty over the outcome of the U.S.‑China trade tension. Meanwhile, headline inflation is expected to climb to 1.6 percent in 2019 before approaching the long-run trend of 2.5 percent in 2020. This is according to the 2018-19 Annual Consultation Report on Malaysia published today by the ASEAN+3 Macroeconomic Research Office (AMRO). The report was prepared on the basis of its Annual Consultation Visit to Malaysia in January 2019 and data availability as of March 11, 2019.

Following the change in government last year, fiscal management has been restructured. The budget deficit targets for 2018 and 2019 were revised higher to incorporate provisions for the outstanding tax refunds and unbudgeted commitments under the previous government as well as the one-off special dividend from PETRONAS. Notwithstanding the revision, the fiscal consolidation continues in 2019 even as the fiscal stance remains expansionary.

The government’s commitment to increase the transparency, accountability, and efficiency of public finance, while continuing with fiscal consolidation, is highly commendable. The 2019 Budget reflects efforts to cut unnecessary spending, review the cost structures of government contracts, and make the existing subsidy and social assistance schemes more targeted. Planned fiscal initiatives should proceed. These include the passage of the Fiscal Responsibility Act and Government Procurement Act, a full disclosure of the government’s assets and liabilities and fiscal risk assessment, the adoption of an accrual-based accounting system, and the establishment of a Debt Management Office.

However, the narrow tax base could hamper fiscal consolidation efforts in the medium-term. In this regard, the expansion of coverage of the sales and services tax, the imposition of a tax on imported services, the launch of the Special Voluntary Disclosure Program, and plans to tax the digital economy and rationalize fiscal incentives, would help to broaden the tax base. Ultimately, revenue-mobilization efforts should aim at reversing the trend decline in the non‑petroleum-related tax‑to‑GDP ratio.

Notwithstanding the sizable foreign capital outflows in 2018, financial conditions have remained stable and Bank Negara Malaysia (BNM)’s foreign reserves have been adequate to cover external funding needs. However, a higher reserves buffer would provide greater flexibility for the BNM to calibrate policy tools to support the economy against adverse shocks.

Likewise, it would be prudent to maintain the current monetary policy stance given the uncertainty in the external environment and the high level of public and household debt. However, the degree of policy accommodation could be eased in the event of a sharper economic slowdown. In this regard, while economic growth moderated only slightly in the first quarter of 2019, BNM reduced the overnight policy rate in response to heightened downside risks and some signs of tightening of financial conditions.

Overall, the economy has demonstrated resilience to external headwinds such as rising trade protectionism and volatility in financial markets and commodity prices. Moving forward, the policy mix should focus on continued fiscal consolidation while safeguarding financial and external stability. Moreover, structural reforms should be geared towards improving the fiscal space and stepping up efforts to boost productivity, such as by leveraging on the 4th Industrial Revolution and promoting human capital development, in order to attain a more inclusive and high-income nation.

About AMRO and AMRO’s Annual Consultation Report:

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.