Malaysia Economic Monitor, June 2013

Following a strong performance in 2012,
Malaysia's economy hit a soft patch in the first
quarter of 2013. Economic growth has been supported by the
strong, broad-based performance of domestic consumption and
investment from public and private sources. The acceleration
of investment growth has been a key feature of the recent
growth trend. Public and private consumption has also
underpinned growth. Accommodative fiscal and monetary
policies have supported both higher (real) household incomes
and sustained credit growth, which along with firm labor
markets provided a solid backdrop for consumption growth
even as agricultural commodity prices declined. Despite
significant expenditure overruns, the government met its
fiscal deficit target for 2012. Supply-side factors kept
inflation subdued amidst robust domestic demand. Monetary
authorities emphasized macro-prudential regulation as the
policy interest rate continued to be pulled in two
directions. Malaysia is likely to continue posting solid
growth rates in 2013 and 2014. Growth in 2013 is projected
to come at 5.1 percent, supported by the strong momentum in
investment growth, still-accommodative fiscal and monetary
policies, higher household income due to tight labor
markets, and modest improvement in the export sector. The
sustainability of Malaysia's favorable near-term
prospects into 2015 and beyond continues to hinge on the
implementation of structural reforms. Having a rigorous
investigation of the effectiveness of various tax incentives
across different industries, and comparing the benefits with
the costs in foregone revenues, will provide important
lessons, to Malaysia and other countries, of the appropriate
role for fiscal incentives in horizontal diversification.