Deciphering China’s Economic Resilience


July 26, 2017

Deciphering China’s Economic Resilience

by Stephen S. Roach*

*Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

https://www.project-syndicate.org/commentary/china-economic-resilience-by-stephen-s–roach-2017-07

Once again, the Chinese economy has defied the hand wringing of the nattering nabobs of negativism. After decelerating for six consecutive years, real GDP growth appears to be inching up in 2017. The 6.9% annualized increase just reported for the second quarter exceeds the 6.7% rise in 2016 and is well above the consensus of international forecasters who, just a few months ago, expected growth to be closer to 6.5% this year, and to slow further, to 6%, in 2018.

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I have long argued that the fixation on headline GDP overlooks deeper issues shaping the China growth debate. That is because the Chinese economy is in the midst of an extraordinary structural transformation – with a manufacturing-led producer model giving way to an increasingly powerful services-led consumer model.

To the extent that this implies a shift in the mix of GDP away from exceptionally rapid gains in investment and exports, toward relatively slower-growing internal private consumption, a slowdown in overall GDP growth is both inevitable and desirable. Perceptions of China’s vulnerability need to be considered in this context.

This debate has a long history. I first caught a whiff of it back in the late 1990s, during the Asian financial crisis. From Thailand and Indonesia to South Korea and Taiwan, China was widely thought to be next. An October 1998 cover story in The Economist, vividly illustrated by a Chinese junk getting sucked into a powerful whirlpool, said it all.

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Yet nothing could have been further from the truth. When the dust settled on the virulent pan-regional contagion, the Chinese economy had barely skipped a beat. Real GDP growth slowed temporarily, to 7.7% in 1998-1999, before reaccelerating to 10.3% in the subsequent decade.

China’s resilience during the Great Financial Crisis was equally telling. In the midst of the worst global contraction since the 1930s, the Chinese economy still expanded at a 9.4% average annual rate in 2008-2009. While down from the blistering, unsustainable 12.7% pace recorded during the three years prior to the crisis, this represented only a modest shortfall from the 30-year post-1980 trend of 10%. Indeed, were it not for China’s resilience in the depths of the recent crisis, world GDP would not have contracted by 0.1% in 2009, but would have plunged by 1.3% – the sharpest decline in global activity of the post-World War II era.

The latest bout of pessimism over the Chinese economy has focused on the twin headwinds of deleveraging and a related tightening of the property market – in essence, a Japanese-like stagnation. Once more, the Western lens is out of focus. Like Japan, China is a high-saving economy that owes its mounting debt largely to itself. Yet, if anything, China has more of a cushion than Japan to avoid sustainability problems.

According to the International Monetary Fund, China’s national savings is likely to hit 45% of GDP in 2017, well above Japan’s 28% saving rate. Just as Japan, with its gross government debt at 239% of GDP, has been able to sidestep a sovereign debt crisis, China, with its far larger saving cushion and much smaller sovereign debt burden (49% of GDP), is in much better shape to avoid such an implosion.

To be sure, there can be no mistaking China’s mounting corporate debt problem – with non- financial debt-to-GDP ratios hitting an estimated 157% of GDP in late 2016 (versus 102% in late 2008). This makes the imperatives of state-owned enterprise reform, where the bulk of rising indebtedness has been concentrated, all the more essential in the years ahead.

Moreover, there is always good reason to worry about the Chinese property market. After all, a rising middle class needs affordable housing. With the urban share of China’s population rising from less than 20% in 1980 to more than 56% in 2016 – and most likely headed to 70% by 2030 – this is no trivial consideration.

But this means that Chinese property markets – unlike those of other fully urbanized major economies – enjoy ample support from the demand side, with the urban population likely to remain on a 1-2% annualized growth trajectory over the next 10-15 years. With Chinese home prices up nearly 50% since 2005 – nearly five times the global norm (according to the Bank for International Settlements and IMF global housing watch) – affordability is obviously a legitimate concern. The challenge for China is to manage prudently the growth in housing supply needed to satisfy the demand requirements of urbanization, without fostering excessive speculation and dangerous asset bubbles.

Meanwhile the Chinese economy is also drawing support from strong sources of cyclical resilience in early 2017. The 11.3% year-on-year gain in exports recorded in June stands in sharp contrast with earlier years, which were adversely affected by a weaker post-crisis global recovery. Similarly, 10% annualized gains in inflation-adjusted retail sales through mid-2017 – about 45% faster than the 6.9% pace of overall GDP growth – reflect impressive growth in household incomes and the increasingly powerful (and possibly under-reported) impetus of e-commerce.

Pessimists have long viewed the Chinese economy as they view their own economies – repeating a classic mistake that Yale historian Jonathan Spence’s seminal assessment warned of many years ago. The asset bubbles that broke Japan and the United States are widely presumed to pose the same threat in China. Likewise, China’s recent binge of debt-intensive economic growth is expected to have the same consequences as such episodes elsewhere.

Forecasters find it difficult to resist superimposing the outcomes in major crisis-battered developed economies on China. That has been the wrong approach in the past; it is wrong again today.

Malaysia’s Economic Report Card: Positive


July 26, 2017

Malaysia’s Economic Report Card:  “Malaysia is on the right course”, says Prime Minister Najib Razak

In delivering his keynote address at InvestMalaysia 2017 in Kuala Lumpur today (July 25), Prime Minister Najib Abdul Razak highlighted the economic transformation under his leadership.

He also launched a scathing broadside at the opposition coalition Pakatan Harapan, whose chairperson is his former mentor turned nemesis Dr Mahathir Mohamad.

Among others, Najib claimed that there has been a concerted campaign to send misinformation overseas to damage Malaysia’s economy for selfish political objectives.

“So if you receive these smears, or you read it in publications that do not check the facts properly, please beware,” he told his audience, comprising local and foreign investors.–www.malaysiakini.com

Full Text of Prime Minister Najib Razak’s Keynote Address (Salutations Removed)

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Prime Minister Datuk Seri Najib Razak, addressing some 2,000 local and international investors attending the Invest Malaysia 2017 Forum–July 25, 2017

As the Prime Minister of Malaysia, I want to lay out the foundations needed for our nation to be counted among the very top countries in the world. We want that competitive edge, and to be a knowledge-based society – but we must always work towards those goals in ways that are sustainable, inclusive and equitable. No Malaysian must ever be left behind. All must participate and benefit from this amazing journey that we are on.–Prime Minister Najib Razak

Seven years ago, in 2010, I introduced our New Economic Model – right here, at Invest Malaysia. This model was designed to transform Malaysia into a high- income nation, and our country into a more inclusive, equitable and sustainable society, with no one left behind, opportunity made available for all, and the right fundamentals put in place to secure a stable and successful future.

We had a plan of reform – economic transformation and taking the tough but responsible choices. And it is clear today, that, aided by the hard work of millions of Malaysians, the plan has worked and is continuing to work.

Let the facts speak for themselves:

Between 2009 and 2016, Gross National Income has increased by nearly 50 percent, and GNI per capita using the Atlas method increased to US$9,850. Based on the World Bank’s latest high-income threshold of US$12,235, we have narrowed the gap towards the high-income target from 33 percent to 19 percent.

2.26 million jobs have been created, which represents 69 percent of the 3.3 million target we want to reach by 2020. Clearly, we are making the right progress towards those goals.

Inflation and unemployment have been kept low. We have attracted unprecedented levels of Foreign Direct Investment, which shows the confidence the world has in Malaysia.

But no wonder. For our growth has been the envy of the advanced economies, even during years of turmoil in the global economy. This year, the World Bank has upped their estimate. We are expected to record a rise in GDP of 4.9 percent, considerably higher than their earlier prediction of 4.3 percent.

Others have also increased their predictions – Morgan Stanley now says 5 percent, while Nomura’s forecast is for the Malaysian economy to grow by 5.3 percent this year. Only yesterday, the IMF has reviewed their forecast from 4.5 percent to 4.8 percent. And growth is expected to be higher next year. So we are on the right trajectory.

Other sets of figures support confidence in Malaysia. In the first quarter of 2017 our trade, for instance, recorded an increase of 24.3 percent – up to RM430.5 billion – compared with the same period last year.

In March, exports breached the RM80 billion mark for the first time. At RM82.63 billion, it was the highest monthly figure for Malaysian exports ever recorded.

The capital market increased by nine percent to a level of RM3.1 trillion in the first six months of this year, and now ranks fifth in Asia relative to GDP. It continues to attract wide interest from both domestic and foreign investors. In fact, in the equity market, there were net inflows of RM11 billion in the first half of 2017, compared with RM3 billion of net outflows during the whole of 2016.

The Malaysian bond market grew to RM1.2 trillion in 2016, while our Islamic capital market has recorded a hugely impressive average annual growth of 10 percent over the last six years, reaching RM1.8 trillion in June 2017.

Malaysia is also home to the largest number of listed companies in ASEAN. At US$29 billion, Bursa Malaysia also recorded the highest amount of funds raised in the last five years in any country in our 10-nation association.

And our currency, the ringgit, has been described by Bloomberg recently as, and I quote, “easily the strongest major Asian currency this quarter, climbing twice as much as the next best, the Chinese yuan”.

All of this can point to only one conclusion – our economy continues to prosper, and we are stronger than ever as a result of the reforms and the programmes the government has put in place.

The markets, the business community and companies like strength and stability. They want the certainty provided by a government that understands that the prosperity of its people is best served by being business-friendly, and that sovereignty is not compromised one inch by the record Foreign Direct Investment this government has secured.

No. It will help build the new Malaysia of the 21st century, and bring many benefits, from knowledge and skills transfers to a rise in the standard of living for the people.

The business community wants the certainty of knowing that the government is committed to the necessary reforms, and is committed to fostering a culture of entrepreneurship and to transparency, accountability, and good regulation.

On that note, I can announce that the government has, in principle, agreed to the establishment of an Integrity and Governance Unit at all GLCs, and state and ministry-owned business entities, under the supervision of the Malaysian Anti-Corruption Commission, precisely to strengthen the confidence all can, should, and do have in Malaysia.

The international business community knows that it has that certainty – with this government. Indeed, they are voting with their feet. HSBC is investing over RM1 billion to build its future regional headquarters in the Tun Razak Exchange, recognising Malaysia’s increasing status as an international financial and business centre.

Broadcom Limited, one of the world’s largest semiconductor companies with a market capitalisation of nearly half-a-trillion dollars, is going to transfer its Global Distribution Hub from Singapore to Malaysia in 2017, from where it will manage the group’s global inventory of RM64 billion a year.

Huawei, a leading global ICT solutions provider which serves more than one- third of the world’s population, has made Malaysia its global operation headquarters, data hosting centre and global training centre, with a total project cost of RM2.2 billion and employing more than 2,370 people.

Saudi Aramco is investing US$7 billion – that’s its biggest downstream investment outside the kingdom – for a 50 percent stake in Petronas’ Refinery and Petrochemical Integrated Development in Johor. That is the single largest investment in Malaysia, and shows the confidence Saudi Arabia has in our people, our technology, and our ability to be a strong partner with their most important business.

Others who are already here are expanding their operations. Finisar Corporation, a global technology leader in optical communications, will invest a further RM610 million in its operation in Perak – bringing its total investment in Malaysia to RM1 billion.

Coca-Cola has already invested RM1 billion in Malaysia since 2010. It announced in March an additional RM500 million investment to expand the size and production capacity of its plant at Bandar Enstek.

I could go on and on. The point is that the confidence and certainty global businesses have in Malaysia brings jobs, lifts wages and helps our workforce upskill.

It is this government that offers that certainty to businesses both in Malaysia and overseas. The opposition offers none at all. They are in chaos. Two leading members of one party can’t agree if the old opposition alliance still exists in the state of Selangor. “Yes, it does”, says one. “Oh no it doesn’t!” says the other. It’s like a Punch and Judy show!

And the latest leadership structure the opposition announced is farcical, sounding a bit like a return-to-work programme for old-age political pensioners!

It is also cynical and deceptive, with three leaders but no clarity on who has executive power among them, and DAP kept deliberately invisible despite controlling the opposition behind the scenes with the vast majority of their parliamentary seats.

As for their Prime Minister candidate, the opposition is so desperate that they are now trying to make the people believe it will be a nonagenarian – who isn’t even a member of parliament, and whose party has just one seat!

But the truth is that in a democracy numbers don’t lie, and DAP remains by far the most dominant party in the opposition. The DAP leader of the last half century is now hiding behind the man who jailed him, trying to deceive Malays into thinking that former leader is their interim candidate for Prime Minister.

Neither can the word of the opposition be relied on. Just recently, a leading member in one party said that, if Malaysia had such good relations with Saudi Arabia, why had the hajj quota not been increased? But it has! Twice this year, from 22,230 to 27,900 and then up to 30,200.

That’s another example of the benefits this government’s policies bring to the people of Malaysia – in this case, our foreign policy of forging friendship abroad, rather than holding grudges for decades, as that certain former leader still does.

But you won’t hear about the very real benefits from our engagement with Saudi Arabia, China, India or anywhere else from the opposition. In fact, they’ll tell barefaced lies about it, just as they have been feeding lies about the economy and stoking fears of economic disaster in Malaysia.

There has in fact been a concerted campaign to send such misinformation overseas to damage Malaysia’s economy for their own selfish political objectives. So if you receive these smears, or you read it in publications that do not check the facts properly, please beware.

It is not fair to the Malaysian people, and it’s not fair to the business community, both at home and abroad.

They, and you, deserve the truth. So let me tell you what a cross-section of respected international bodies has to say about this government’s record.

The OECD’s most recent economic assessment of Malaysia stated, and I quote: “Malaysia is one of the most successful Southeast Asian economies… thanks to sound macroeconomic fundamentals and its success in transforming its economy into a well-diversified and inclusive one.”

We are ranked second in ASEAN in the World Bank’s Doing Business Report 2017 – and 23rd overall, among 190 economies globally.

We were ranked second among the Southeast Asian nations in the World Economic Forum’s Human Capital Index 2016, up one place from last year’s third spot.

We are ranked third among 190 economies, worldwide, for Protecting Minority Investors, by the World Bank Doing Business Report 2017.

The World Economic Forum’s Global Competitiveness Report 2016-2017 ranks Malaysia fourth among 138 economies for Strength of Investor Protection.

We rank eleventh out of 125 countries in the Venture Capital and Private Equity Attractiveness Index, by the IESE Business School in Spain.

The ratings agency Fitch recently reaffirmed our A- rating and stable outlook.

And a recent survey by BAV Consulting and the Wharton School at the University of Pennsylvania declared Malaysia to be the “best country to invest In”. It said, and I quote, “Malaysia is the clear frontrunner in this ranking, scoring at least 30 points more than any other country on a 100 point scale.”

There is clear international unanimity that Malaysia is on the right course, and the figures and accolades I have reported to you today are the direct results of this government’s steering of the economy through uncertain and choppy global waters.

IMF reported that the resilience of our economy was due, and I quote, to “sound macroeconomic policy responses in the face of significant headwinds and risks”. And these sound policies are the reason why they said that: “Malaysia is among the fastest growing economies among peers.”

And lastly, the World Bank has shown that it agrees as well. In its latest report, issued just last month, it said that the government’s “macroeconomic management has been constantly proactive and effective in navigating near-term challenges in the economic environment”.

It concluded, and I quote: “The Malaysian economy is progressing from a position of strength.”

Does that really sound like the Malaysian economy is failing, and that we are in danger of going bankrupt, as the opposition would have you believe?

I think the World Bank, the OECD and the IMF know what they are talking about – and I’m sure, ladies and gentlemen, that you do too.

We have only arrived at that position of strength because we put in place a far-reaching economic plan; and because we have been unafraid to take the tough decisions to build up the resilience of the Malaysian economy.

We have diversified government sources of income, including reducing reliance on oil and gas revenues from 41 percent in 2009 to 14 percent today. Given the huge drop in the price of oil, just imagine how we would be suffering if we had not done that.

We also needed to widen the tax base, and so, in common with around 160 other countries, we introduced a goods and services tax, or GST. It was not popular, but it was the right thing to do – as every reputable economist has confirmed.

GST has helped us in our determination to steadily reduce the deficit – we are on course to reduce it to three percent this year, from 6.7 percent in 2009 – and GST has been crucial to retaining our good assessments by the international ratings agencies.

Yet the opposition says they would abolish it. Tell me, from where exactly would they produce the RM41 billion collected in GST revenue last year? Out of a hat?

If GST was abolished, it would not just be a matter of a revenue shortfall. The deficit would rise from 3.1 percent to 5 percent. Our ability to fund the construction of schools, hospitals and other essentials would be affected.

Government debt would rise above our self-imposed level of 55 percent of GDP. Our sovereign credit ratings would then be downgraded. Lending costs for all, such as loans for personal use, for business and for housing, would increase. The people would suffer, and they would suffer directly.

One of Malaysia’s prominent independent analysts, the Director of Economics at the Institute of Strategic and International Studies Malaysia, had it right when he said the idea of getting rid of GST was, and I quote, “preposterous” and “economically nonsensical”. “I don’t think anyone in their right mind would want to do that,” he said.

It is another example of what the opposition do when faced with tough decisions: they seek the easy or the populist way out, regardless of whether it makes sense or is even possible. They are not being straight with the Malaysian people.

This government, however, will always be straight with the people and we will always do right by the people. We will always put their interests first, from economic welfare to security. Even if it is not the most popular thing to do, we will not hesitate – because it is the responsible thing to do for the country.

This is also one of the reasons I am not very popular with that certain nonagenarian. Under his leadership many corners were cut, and the Malaysian people had to pay a very high price so that a few of his friends benefited, even when symbols of national pride had horrendous and catastrophic decisions inflicted on them.

But I say to you now that under this government, we are cracking down on crony capitalism. No more sweetheart deals. No more national follies kept going to stroke the ego of one man. No more treating national companies as though they were personal property.

Because it is the people who suffer, and we will not tolerate a few succeeding – and not on their own merits – while the many are denied opportunities, all for the interests of a selfish few.

Now some of you may be thinking that I have not mentioned national companies where there have been issues. At 1MDB it is now clear that there were lapses in governance.

However, rather than bury our heads in the sand, we ordered investigations into the company at a scale unprecedented in our nation’s history. Rather than funnel good money after bad to cover up any issues 1MDB may have faced – the model embraced by a former leader – I instructed the rationalisation of the company.

And it is progressing well. Indeed, many of the assets formerly owned by 1MDB are thriving. One only needs to drive past Tun Razak Exchange to see the new construction for confirmation.

But let’s not forget that while there were issues at 1MDB, certain politicians blew them out of proportion, and tried to sabotage the company, in an attempt to topple the government in-between election cycles.

At the time we knew the real issue was not 1MDB, and that if 1MDB hadn’t been around they would have chosen another line of attack to try to illegitimately change the government. So we stood steadfast, and resolute, in the face of this orchestrated campaign. Because we will not be deterred from our duty, as the democratically elected government, to serve the nation.

Our priorities were made crystal clear when we introduced the concepts of the “capital economy” – which refers to the macro perspective – and the “people economy”, which is focused entirely on the people, the most precious asset of our great country.

We face challenges ahead, of course. We need to improve productivity. We need to raise the levels of education and skills. We need to put innovation and creativity at the heart of the economy of the future.

This why we have partnered with the Chinese technology leader Alibaba to create the Digital Free Trade Zone, the world’s first special trade zone that will promote the growth of e-commerce, and provide a state-of-the-art platform for both SMEs and larger enterprises to conduct their digital businesses and services.

This initiative is part of the digital roadmap which aims to double e-commerce growth from 10.8 per cent to 20.8 per cent by 2020.

But we can only achieve such targets with the people, and by empowering the people. To ensure the dignity of all, we have virtually eliminated poverty, to less than one percent. We are delighted that the income of the bottom 40 percent households has been increasing at a compound annual growth rate of 12 percent since 2009, when I took office.

But we know that cost of living issues hit those with low incomes the hardest; which is why we distributed RM5.36 billion in 1Malaysia People’s Aid, or BR1M, to 7.28 million households in 2016. This is why we ensured that essential foods and necessities are zero-rated for GST.

At the same time, we have many agencies promoting affordable housing programmes, and why we built and restored nearly 95,000 houses for the rural poor last year. Other affordable housing projects include PPA1M, for civil servants; PR1MA, for the urban middle income group; and the People’s Housing Programme for the lower income group, or Bottom 40, with monthly rents as low as RM124.

Infrastructure, too, is absolutely vital. It is crucial for our cities, and life-changing for rural communities. From 2010 to 2016 we delivered 6,042 kilometres of new rural roads, provided 350,000 houses with access to clean water, and connected 154,000 houses to electrical services.

At the end of last year, the first phase of the Mass Rapid Transit project was completed, and recently, the second phase of the Sungai Buloh-Kajang MRT Line has been launched. We now have 51 kilometres of operational line with 31 stations.

This will take 160,000 cars off road, making Kuala Lumpur more liveable. It created 130,000 new jobs, of which 70,000 are direct employment. And best of all, it was completed ahead of schedule and RM2 billion below budget. We are now planning for MRT 2 and 3.

The Pan Borneo Highway in Sarawak and Sabah will be a game changer for our people there, encouraging greater mobility, boosting industry and tourism and creating thousands of new jobs.

In a few years time, we will have the first high-speed rail link connecting Kuala Lumpur to Singapore, which will cut travel time between the two cities to 90 minutes, as compared to more than four hours by car.

And the East Coast Rail Link will bring huge benefits, jobs and a new connectedness to the people of Pahang, Terengganu and Kelantan in particular.

In other areas, we are seeing the benefits of our programmes for all the people. The national pre-school enrolment rate rose to 85.6 percent in 2016, for instance, as opposed to 67 percent in 2009; and we have achieved almost universal enrollment for the five years and upwards age group.

Women have seen great strides as well. The female labour force participation rate has increased from 46 percent in 2009 to 54.3 percent last year. That’s over 700,000 more women in the workforce.

And I am delighted to be able to announce that Malaysia has reached its target of women making up 30 percent of top management – that’s 1,446 women, out of a total of 4,960 in top management excluding CEOs, as of December 2016.

We want to go further, though, and have set 2020 as the date by which we want all public listed companies (PLCs) to have at least 30 percent women at board level. Because we know that when women succeed, we all succeed.

Unfortunately, we still have 17 “top 100” PLCs that have no women at all on their board. This just is not good enough, and I call on these companies to immediately address this lack of diversity. I would like to announce that, from 2018, the Government will name and shame PLCs with no women on their boards.

As many of you will know, SMEs make up 97 percent of businesses in Malaysia, and one of the hallmarks of my administration has been its support and encouragement for this backbone of our economy.

So I am pleased to be able to officially launch today the Leading Entrepreneur Accelerator Platform Market, or LEAP Market, by Bursa Malaysia. This is a new qualified market which will offer an alternative way for small and medium companies to raise funds and grow their business to the next level.

It is in line with our SME Masterplan which aims to raise the share of GDP contributed by SMEs, their numbers of employees, and their volume of exports.

And it is another of the many initiatives that my government has put in place in pursuit of our transformation, and that prove our trustworthiness as a business-friendly government of a vibrant economy.

We want you to see Malaysia as a gateway to ASEAN and the region, and with the eventual conclusion of the Regional Comprehensive Economic Partnership or RCEP, we want you to see Malaysia as a base from which to access almost 50 percent of the world’s population, and over 30 percent of global GDP.

This year, we are celebrating the 60th anniversary of independence. From relatively humble beginnings, we have grown and evolved into a modern economy and society with a record to be proud of. But we are looking to the future as well – which is why we have produced the 2050 National Transformation, or TN50, initiative.

Through TN50, we want to listen to our rakyat. We want them to be heard. And through our dialogue sessions, we are listening to the aspirations of our youth for what they want the Malaysia of 2050 to be.

As the Prime Minister of Malaysia, I want to lay out the foundations needed for our nation to be counted among the very top countries in the world. We want that competitive edge, and to be a knowledge-based society – but we must always work towards those goals in ways that are sustainable, inclusive and equitable. No Malaysian must ever be left behind. All must participate and benefit from this amazing journey that we are on.

We invite you be to part of that journey, and I hope today we are able to shed light on the tremendous opportunities that Malaysia has to offer. We urge to you to look at our potential; to look at the great achievements the government’s transformation programme has delivered, and continues to deliver; and invest in Malaysia.

 

IMF on Malaysia–Report Card


May 3, 2017

International Monetary Fund on Malaysia–Report Card

by The International Monetary Fund

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Putrajaya–The Administrative Capital of Malaysia

The IMF conducts an Annual Review of member country economic situation. At the conclusion of the consultations the Executive Board considers the findings which are also conveyed to the Government. A Press Release is issued  together with access to the full staff report on the Fund’s website. The Report  is in the nature of a “Report Card”.

The text of the Press Release is reproduced below. The full report can be accessed and downloaded from  ::

http://www.imf.org/en/Publications/CR/Issues/2017/04/28/Malaysia-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44869

On March 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Malaysia.

Despite a challenging global economic environment, the Malaysian economy performed well over the past few years. Notwithstanding the impact of the global commodity price and financial markets volatility, the economy remained resilient, owing to a diversified production and export base; strong balance sheet positions; a flexible exchange rate; responsive macroeconomic policies; and deep financial markets. While real GDP growth slowed down, Malaysia is still among the fastest growing economies among peers. The challenging global macroeconomic and financial environment puts premium on continued diligence and requires careful calibration of policies going forward.

Risks to the outlook are tilted to the downside, originating from both external and domestic sources. External risks include structurally weak growth in advanced and emerging market economies and retreat from cross-border integration. Although the Malaysian economy has adjusted well to lower global oil prices, sustained low commodity prices would add to the challenge of achieving medium-term fiscal targets. Heightened global financial stress and associated capital flows could affect the economy.

Domestic risks are primarily related to public sector and household debt, along with pockets of vulnerabilities in the corporate sector. Federal debt and contingent liabilities are relatively high, limiting policy space to respond to shocks. Although the household debt-to-GDP ratio is likely to decline, household debt also remains high, with debt servicing capacity growing only moderately.

Real GDP growth rate is expected to increase moderately to 4.5 percent year-on-year (y/y) in 2017 from 4.2 percent in 2016. Domestic demand, led by private consumption, continue to be the main driver of growth, while a drag from net exports, similar to 2016, will remain.

Consumer price inflation is projected to rise and average 2.7 percent y/y in 2017 on the back of higher global oil prices and the rationalization of subsidies on cooking oil. The current account surplus would be largely unchanged as impacts from an improved global outlook and higher commodity prices would be offset by the strength of imports on the back of a resilient domestic demand.

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Bank Negara Malaysia—in full control of the Pulse of the Malaysian Economy

Executive Directors commended the resilience of the Malaysian economy, which reflects sound macroeconomic policy responses in the face of significant headwinds and risks. While Malaysia’s economic growth is expected to continue in 2017, weaker-than-expected growth in key advanced and emerging economies or a global retreat from cross-border integration could weigh on the domestic economy. Against this background, Directors urged vigilance and continued efforts to strengthen policy buffers and boost long-term economic growth.

Directors agreed that the authorities’ medium-term fiscal policy is well anchored on achieving a near-balanced federal budget by 2020. The planned consolidation will help alleviate risks from elevated government debt levels and contingent liabilities and build fiscal space for future expansionary policy, as needed.

Directors recommended that the pace of consolidation reflect economic conditions and that any counter-cyclical fiscal policy measures be well-targeted and temporary. They noted that improvements to the fiscal framework, such as elaborating medium term projections and preparing and publishing an annual fiscal risks statement, would help anchor medium-term fiscal adjustment and mitigate risks.

Directors agreed that the current monetary policy stance is appropriate. Going forward, Bank Negara Malaysia (BNM) should continue to carefully calibrate monetary policy to support growth while being mindful of financial conditions.

Directors emphasized that global financial market conditions could affect the monetary policy space and should be carefully monitored.

Directors noted that the banking sector is sound overall and that financial sector risks appear contained. Nonetheless, they cautioned that potential pockets of vulnerability should be closely monitored. They noted that household debt remains relatively high, while in the corporate sector, there are emerging vulnerabilities in some sectors. Directors suggested that macroprudential measures be adjusted if needed.

Directors underscored the central role of macroeconomic policy and exchange rate flexibility in helping the economy adjust to external shocks. In this regard, they welcomed the authorities’ commitment to keeping the exchange rate as the key shock absorber. They recommended that reserves be accumulated as opportunities arise and deployed in the event of disorderly market conditions. Noting the authorities’ aim to improve the functioning of the onshore forward foreign exchange market, Directors urged the BNM to monitor the effects of the recent measures introduced in this regard, recognizing their benefits and costs.

They emphasized that close consultation and communication by BNM (Bank Negara Malaysia–Central Bank) with market participants will be essential in further developing the foreign exchange market and bolstering resilience.

Directors underscored that steadfast implementation of the authorities’ ambitious structural reform agenda is key to boosting long-term economic potential. They supported the emphasis on increasing female labor force participation, improving the quality of education, lowering skills mismatch, boosting productivity growth, encouraging research and innovation, and upholding high standards of governance.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.