Favorable Prospects for Malaysia’s Diversified Economy

Growth likely to remain healthy in 2015, despite lower energy prices

End of fuel subsidies and start of Goods and Services tax is timely, and good for efficiency, equity, and the environment

Exchange rate flexibility will help non-energy exports

In their annual report on the health of the Malaysian economy, the report’s authors say growth is expected to moderate to about 4¾ percent this year while headline inflation will likely increase slightly to about 3¼ percent in 2015 as a result of an end to fuel subsidies, the introduction of a Goods and Services Tax (GST), and exchange rate depreciation.

Inflationary pressures are expected to remain subdued, helped by lower oil and gas prices. Activity will be led by consumption and growth in private investment in the non-oil sector, which is likely to benefit from lower energy costs and higher prices of non-commodity exports.

Private consumption growth is likely to moderate, reflecting the net effects of lower commodity prices, the impact of the new GST, and slower credit growth, as financial conditions tighten, but remain accommodative. The report’s authors added that the current macroeconomic policy mix was appropriate.

Exports and private demand offset lower public spending

Last year’s recovery in exports and continued strong private demand offset mild headwinds from lower public spending, while private investment continued to be fueled by accommodative financial conditions and the catalytic effects of long-term public investment programs. The report’s authors also highlighted the steady increase in the share of investment in Malaysia’s economy in recent years, while strong employment and wage growth supported private consumption.

The ringgit appreciated against the dollar through mid-August but subsequently depreciated by 10 percent as oil prices fell, for a cumulative depreciation by year-end of about 6 percent since January 2014, with further depreciation pressures in early January 2015.

Reserves have declined by over $15 billion between mid-August to end-December 2014 amid capital outflows. But Malaysia’s reserve buffers remain adequate, the IMF noted.

The impact of lower energy prices

The report assesses the projected decline in average crude oil prices for 2015 as a net negative shock for Malaysia, which is a large net exporter of natural gas, crude palm oil, and other commodities. Lower commodity prices will be a drag on the economy as investment in commodities and the energy...