SINGAPORE, October 17, 2024 – Malaysia’s growth momentum is expected to be sustained this year and next, driven by resilient domestic demand and a recovery in external demand. Growth is projected to accelerate to 4.7 percent in 2024 and 4.9 percent in 2025. Inflation has moderated but is subject to upside risks from fuel subsidy rationalization. The authorities should be prepared to tighten monetary policy to contain any second-round effects on inflation from the adjustment in fuel prices. Restoring medium-term fiscal space, building up foreign reserves, and accelerating structural reforms will help foster further economic resilience and raise potential growth.
These conclusions are highlighted in the 2024 Annual Consultation Report on Malaysia published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was based on AMRO’s Annual Consultation Visit to Malaysia in July 2024, and data and information available up to August 16, 2024.
Economic developments and outlook
Growth is projected to accelerate to 4.7 percent in 2024 and 4.9 percent in 2025 after a moderation to 3.6 percent last year. The robust growth momentum is supported by strong domestic demand and strengthening export recovery amid the global technology upcycle. Labor market conditions remain favorable. The unemployment rate has fallen to its pre-pandemic level and labor force participation has soared to a record high.
The policy rate has remained unchanged since May 2023 amid easing inflation and improving demand conditions. Headline and core inflation declined steadily in 2023, while planned subsidy rationalization has been gradually rolled out. With diesel prices successfully floated in June, attention now turns to the planned subsidy rationalization of RON95 fuel. Its potential inflationary impact would depend on the phasing of the adjustment.
Higher corporate and personal income tax collection helped cover increased expenditure on subsidies and social assistance and narrowed the fiscal deficit to 5.0 percent of GDP in 2023. Fiscal deficit is expected to narrow further in 2024 and 2025, but it will be challenging to meet the government’s medium-term deficit target of 3.5 percent of GDP in the absence of new revenue measures.
The external position weakened last year due to a smaller trade surplus and large portfolio investment outflows, but is expected to improve. Renewed depreciation pressures on the ringgit subsided earlier this year after various initiatives including the coordinated efforts between the government and Bank Negara Malaysia (BNM) to encourage Government-Linked Companies and Government-Linked Investment Companies to repatriate and convert their foreign investment income for a more balanced two-way flow. Malaysia’s banking system remains sound with sufficient buffers to withstand macro-financial shocks.
Risk, vulnerabilities, and challenges
Risks to the growth outlook are broadly balanced in the near term. Downside risks arise from weaker-than-expected growth in major economies and adverse spillovers from the U.S. presidential election. Upside risks include faster implementation of investment projects. Commodity price shocks and uncertainty about the timing and quantum of RON95 subsidy rationalization are key risks for inflation.
Over the medium term, escalating tensions between the U.S. and China could lead to global economic fracturing, with ramifications on Malaysia’s trade and investment. Other challenges include a lack of skilled talent, which could hinder industrial upgrading; inadequate retirement savings amid an aging population; and low preparedness for natural disasters and climate change.
Policy recommendations
Monetary policy calibration should continue to take a data-dependent approach. The emergence of second-round effects on inflation from fuel subsidy rationalization would warrant a tightening of monetary policy.
Although exchange rate flexibility should be maintained as a shock absorber, foreign exchange interventions may be needed in the event of excessive volatility. Strong external buffers are required for such interventions to be effective. BNM should continue to build up foreign reserves when the opportunity arises.
The government’s continued fiscal consolidation should be supported by subsidy rationalization and tax reforms. A phased implementation of RON95 subsidy rationalization with effective communication is recommended to avoid a large inflation shock and allow for policy impact assessment. To achieve the medium-term fiscal target, the government should consider reintroducing the goods and services tax after the full implementation of e-invoicing. Following the enactment of the Public Finance and Fiscal Responsibility Act, the planned Government Procurement Act should be expedited to further strengthen governance, accountability, and transparency.
Structural reforms should be accelerated to support industrial upgrading, particularly in moving up the semiconductor value chain. The authorities are encouraged to address talent and skill shortages, improve productivity and wages, and push for greater research collaboration among industry, government, and academia to enhance innovation capability.
About AMRO
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and stability of the ASEAN+3 region, comprising 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 regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.
About AMRO’s Annual Consultation Report
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. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.