Abstract

Prospects for Malaysia’s well diversified economy are favorable despite lower prices for its exports of energy and other commodities. Growth is expected to moderate in 2015 to 4.8 percent from 5.9 percent in 2014. Headline inflation will increase slightly, to 3.2 percent in 2015 from 3.1 percent in 2014, reflecting the net impact of subsidy rationalization, Goods and Services Tax (GST) implementation, and exchange rate depreciation. Inflationary pressures should remain subdued, aided by lower oil and gas prices. Impact of lower oil prices. The sharp decline in energy prices is expected to have a modest negative impact on Malaysia’s near-term growth prospects and lower its current account surplus. Although lower commodity prices will be a drag on the economy, manufacturing exports should get a boost, aided by a weaker exchange rate and higher growth in the U.S. Macroeconomic policy mix. The current macroeconomic policy mix is appropriate. Fiscal consolidation is well timed, appropriately paced, and remains on track. While monetary policy is on hold reflecting increased global uncertainty, a market-driven tightening of domestic liquidity and financial conditions is under way. Fiscal Policy. The elimination of fuel subsidies and introduction of the GST are timely and decisive reforms with long-lasting benefits. In the near term, eliminating fuel subsidies will help offset the fiscal impact of lower energy revenues. In the medium term, these reforms will also help the authorities diversify budgetary revenues, balance the budget, and lower the debt to GDP ratio. Financial stability. High house prices and household debt remain a concern, although rising real interest rates should dampen growth of financial risks. BNM is pro-actively managing the risks through stress testing, enhanced supervision, and targeted macroprudential policies. Nevertheless, further macroprudential measures may be needed. Structural policies. The authorities are implementing structural reforms on a wide front in support of Malaysia’s goal of achieving high-income status by 2020. Continued investment in infrastructure and in research and development can help spur home-grown innovation. Together with improvements in the quality of education and increased female labor force participation, these efforts can help raise productivity, support higher sustainable growth, and foster a more inclusive society.