Publication: NST
Date of publication: Mar 2, 2013
Section heading: Business Times
Page number: 001
Byline / Author: By Rupa Damodaran
KUALA LUMPUR: The International Monetary Fund lauded Malaysia's financial system for its sound and well-capitalised banking system, backed by a strong regulatory and supervisory framework.
In its first financial sector assessment programme (FSAP) on Malaysia in 2012, the IMF, together with the World Bank, commended the system, saying it has weathered the recent global financial crisis.
"Stress tests suggest that banks are resilient to a range of economic and market shocks; though the high level of reliance on demand deposits is a potential vulnerability," the IMF said in a report from Washington yesterday.
It, however, warned that risks to stability from high household debt or, potentially, from capital flow volatility, must be monitored closely but are contained by high bank capital buffers, ample international reserves, and sound monetary and financial policies.
Policies have so far helped cool off household credit growth and housing prices.
The FSAP has advised that regulations for well developed insurance and securities be strengthened further while the Labuan IBFC's regulatory and supervisory framework needs to be strengthened considerably.
"Malaysia must regain the fiscal space it lost after the global financial crisis," it also said in the annual Article IV Consultation report, adding that the authorities' commitment to medium-term fiscal consolidation should have a concrete and comprehensive plan.
Consolidation efforts must be supported by structural reforms to improve the efficiency of fiscal policy.
"The revenue base must be broadened and diversified away from energy-related receipts, universal fuel subsidies must be gradually replaced by targeted social transfers and public financial management must be strengthened."
It commented that the new minimum wage policy that has taken effect from January and other reforms to strengthen social safety nets will help to boost growth.
In its Article IV Consultation, IMF found Malaysia's macroeconomic policy mix in 2012-2013 "well-calibrated", referring to Bank Negara Malaysia's slightly accommodative monetary policy stance with regard to growth support and inflation and also balancing concerns about the growing public debt.
"The deficit target seems feasible if there are only minor slippages in current spending and a modest fuel subsidy reform is adopted in the second half of 2013."
However, should downside risks to the growth outlook materialise, Bank Negara Malaysia has ample room to cut rates and allow the exchange rate to act as a shock absorber.
In response to commodity price shocks, the fund suggested that the exchange rate should be allowed to adjust.
"If the shock pushes prices up, monetary policy tightening ought to be considered only if second round price effects risk unhinging inflation expectations,"it said, adding that any fiscal revenue windfalls from higher commodity prices should be saved.
On its outlook, the fund, which earlier projected Malaysia to grow by 4.7 per cent in 2013, says the economy will remain robust, fuelled by resilient domestic demand and a modest uptick in exports while inflation should remain restrained.
Risks to the outlook are mainly external and tilted to the downside.
It commented that the general election, which must be held by June, may add to short-term market volatility.
Following the IMF's consultations in 2010 and 2011, Malaysia agreed on the need for fiscal consolidation and targeted a fiscal deficit of three per cent of GDP by 2015 as well as reducing government debt to 40 per cent of the GDP by 2020.
The Malaysian authorities also agreed on the need for a GST and are planning to introduce it as soon as feasible.
On the IMF's advice to phase out subsidies and replace with targeted cash transfers to the needy, the Malaysian authorities plan to rationalise subsidies and have further increased the use of cash transfers in recent budgets.
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