KUALA LUMPUR (March 12): Malaysia’s financial sector appears resilient with sound profitability and liquidity indicators, as well as low non-performing loans, said the International Monetary Fund (IMF).

However, the local authorities are encouraged to continue “close monitoring” of risks stemming from large household debt and the real estate market, IMF said in a statement yesterday.

This was on the back of the fact that Malaysia’s household debt is high compared with its peers, with a large share of mortgages and with pockets of vulnerability among low-income groups.

Malaysia’s household debt-to-gross domestic product (GDP) was recorded at 83.2% as at September 2018, Finance Minister Lim Guan Eng said in November last year. Around 52.8% of the debt was for housing loans.

The IMF executive board expressed these views following the conclusion of its 2019 bilateral discussion with Malaysia on Feb 15, as required under Article IV of IMF’s Articles of Agreement, it said.

The fund also commented on “residency-based differentiation” in the property market, likely referring to changes in the real property gains tax (RPGT) on profits from disposal of property or shares in property companies in the sixth year and beyond, as announced in Budget 2019.

At the time, the government announced that it will raise the RPGT for companies, non-citizens and non-permanent resident holders to 10% from 5%, while citizens and permanent residents will now have to pay 5% from nil previously.

“A number of the [IMF] directors agreed that the measures related to residency-based differentiation in the property market should be gradually phased out as the systemic risks dissipate,” said IMF.

Fund supports Malaysia’s monetary policy stance

On monetary policy, the IMF supported Malaysia’s “broadly neutral” monetary policy stance, although its directors were mixed about the Bank Negara Malaysia’s requirement for businesses to convert 75% of their foreign currency-denominated export proceeds into ringgit.

IMF projected Malaysia’s GDP growth rate at 4.7% in both 2018 and 2019, before rising to 4.75% over the medium term.

It also projected an inflation rise to above 2% in 2019 compared with 1% estimated for 2018, as the effect of the goods and services tax removal dissipates and oil subsidies become targeted.

IMF also shared that Malaysia’s medium-term growth outlook “remains favourable”, although downside risks remain for the “highly open economy” stemming primarily from the external environment, including oil prices, rising protectionism and a slowdown in China.

“Domestically, contingent liabilities could necessitate additional measures to ensure medium-term fiscal sustainability,” it said.

The fund also warned of lower investment and growth, should the ongoing reform agenda pushed by the government faces delays or resistance and in turn undermines confidence.

Recommendations by the IMF to the government include to continue safeguarding growth and financial stability while implementing “credible” macroeconomic policies.

“[IMF] directors agreed with the planned gradual pace of fiscal consolidation in 2019 and over the medium term to support debt reduction and strengthen fiscal buffers,” the fund said.

It also encouraged the development of a strengthened fiscal framework that would “rely on credible revenue and expenditure measures”.

“Noting Malaysia’s low tax revenue ratio, the directors emphasised that revenue mobilisation should be a priority — not only to support medium-term consolidation, but also to help finance needed expenditure to achieve government priorities identified under the Mid-Term Review of the 11th Malaysia Plan,” it added.

This article first appeared in The Edge Financial Daily, on March 12, 2019.

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