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COUNTRY REPORT – MALAYSIA

AN EXPORT DESTINATION?

AN IMPORT SOURCE?

ECONOMIC UPDATE November 24, 2014

 

This short form report follows on from the report dated February 2014.  Near term, growth prospects continue to remain strong with Real GDP growth in the year ending 31st December 2014 projected to come in at 6 percent.  Growth however is expected to moderate in 2015 to around 5.25% although private domestic demand is expected to remain robust. Inflation prospects are to increase in 2015 as a result of GST implementation but subdued underlying inflationary pressures will mitigate its impact.

There has been a slowing of import growth and the effect of this on the current account surplus is projected to increase to above 5 percent, this has also been assisted by a modest recovery in export demand. Overall the current account surplus is expected to remain acceptable in 2015 but may narrow to a certain extent due to lower oil and gas prices.

It is expected that Malaysia will achieve the 2015 federal budget deficit target of 3.5 percent which is down from 3.9 percent in 2013. Lower oil prices have been addressed by the removal of fuel subsidies and that could mean the defecit could decline below 3 percent of GDP in 2015. Equality driven measures should emanate in the economy due to an overall fiscal strategy which is targeted at the low – income groups. There are also moves to implement performance based budgeting and accrual accounting. Also recommendations by the IMF include an improvement in fiscal management, the development of a medium-term budgetary framework, fiscal reports and a greater transparency for government linked entities.

There has been a strong period of credit growth resulting in house prices and financial risk taking being elevated.  Bank Negara Malaysia have implemented strong controls over the past two years and this has slowed growth in consumer lending. However household leverage continues to be high although risks are mitigated to a degree by substantial holdings of financial assets. There may be an additional requirement for macro-prudential measures if financial imbalances intensify. An appropriate monetary stance in July was appropriate as economic growth strengthened and helped reverse negative real interest rates and slowed growth in leverage. Vigilant, proactive supervision and regulation remain important to identify growing risks, particularly in regard to the non – bank sector.

THE FUTURE

There has been very strong economic growth, high investment and improvements in the business sector. However lower potential growth in the advanced economies may mean difficulty in maintaining this growth performance.  There is a need for continued infrastructure investment, supported by enhanced public finance management which may ease bottlenecks and support sustainable growth.  Such reforms, supported by continual financial sector development and greater

COUNTRY REPORT – MALAYSIA (cont.)

financial inclusion can accelerate productivity growth, encourage value – added activities and help reduce income inequality.

In the future Malaysia should benefit from its outward economic orientation and the strengthening of regional economic and financial integration, already underway including the creation of the ASEAN Economic Community in 2015 and other regional trade initiatives.

THE MALAYSIA – AUSTRALIA FREE TRADE AGREEMENT (MAFTA)

This Free Trade Agreement was signed in May 2012 and came into effect on January 1, 2013.

The intention is for Malaysia to eliminate tariffs on 97.6 percent of goods imported from Australia moving to 99 percent by 2017.

Malaysian exports will benefit free entry in to Australia as from day one.

Sources : IMF, Senior Officials of the Government of Malaysia and Bank Negara Malaysia

John Brooks

Trade Economist

The Auspacific Institute

25 November 2014

042 12 85 888

 

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