Malaysia’s economic growth has sloweddown but remains resilient to external headwinds. Theeconomic growth rate slowed from 5 percent in 2015 to 4.2percent, year on year, in the first three quarters of 2016.Private consumption growth slowed down due to a softeninglabor market and households’ ongoing adjustment to a contextof fiscal consolidation. Public investment in infrastructureis offsetting moderation in investment in the oil and gassector. The gross domestic product (GDP) growth rate isprojected to reach 4.2 percent in 2016, with slowimprovement moving forward. The fiscal consolidation processremains on track despite lower oil-related revenues.External developments pose the greatest risk to Malaysia’sgrowth trajectory. Uncertainty regarding the impact ofpotential US fiscal stimulus policies on global trade,energy prices, financial flows and exchange rates is a majorsource of external risk, as evidenced with the recentfinancial outflows from emerging markets and its impact onthe value of the ringgit. Bank Negara Malaysia (BNM) hasintroduced measures to curb ringgit trading in offshoremarkets while developing and deepening onshore foreignexchange future markets. Continuing good performance onfiscal outcomes, in large part thanks to the introduction ofGST, is important in building confidence in the policyframework. This could be supported by further mobilizing anddiversifying fiscal revenues, including by broadening thebase for the personal income tax and removing someexemptions in the GST. Also, raising efficiency ofoperational expenditure (i.e. improving the targeting ofsocial assistance) and development expenditures (i.e.greater inter-agency coordination) could provide someadditional fiscal space.
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