KUALA LUMPUR (March 5): Malaysia’s economy is expected to moderate to about 4.75% this year, while headline inflation will likely increase to about 3.25% as a result on an end to fuel subsidies, according to the International Monetary Fund’s (IMF) economists.

In the IMF Survey Magazine’s survey online published March 3, they said  Malaysia’s growth was likely to remain healthy in 2015, despite lower energy prices.

The IMF economists in their annual report on the health of the Malaysian economy said that the end of fuel subsidies and teh start of the Goods and Services Tax (GST) was timely, and good for efficiency, equity and the environment.

They said inflationary pressures were 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,” they said.

They said private consumption growth was 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.

They added that the current macroeconomic policy mix was appropriate.

The IMF report said 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.

It 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 reprt said the ringgit appreciated against the dollar through mid-August but subsequently depreciated by 10% 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,” said the IMF.

The report assessed 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.

It said the lower commodity prices would be a drag on the economy as investment in commodities and the energy sector fall and the negative income effect of a higher exchange rate will reduce demand for services.

“However, manufacturing exports should get a boost, aided by a weaker exchange rate and higher growth in the United States.

“Also, lower energy costs should help stimulate the non-oil sectors. Consequently, only a modest negative impact on growth is expected,” it said.

The IMF report said that in the near term, eliminating fuel subsidies at the pump would help offset the impact on the federal budget of lower energy revenues.

“Over the medium term, these reforms will also help the authorities diversify budgetary revenues, balance the budget, and lower the debt-to-GDP ratio. Eliminating fuel subsidies is also an environmentally friendly move,” it said.

The report also said that strengthening the social safety net was an integral part of the authorities’ fiscal strategy.

It said untargeted fuel subsidies were regressive as higher-income households benefited more from the subsidies than lower-income ones.

“Also, the elimination of fuel subsidies frees up resources that can be redirected to better support the poor,” it said.

The report added that to mitigate the impact of subsidy rationalisation and GST, the 2015 budget calls for increased cash transfers to poorer households (those earning less than RM4,000 per month).

It said the authorities were also reviewing overlapping and fragmented cash transfer programs to improve their efficacy.

“The authorities are implementing structural reforms on a wide front in support of Malaysia’s goal of achieving high-income status by 2020.

“Continued investment in infrastructure and in research and development can help spur home-grown innovation and increase incomes.

“Together with improvements in the quality of education, these efforts can help raise labor productivity, support higher sustainable growth, and foster a more inclusive society,” it said.