The economy will likely grow by 4.6 per cent in 2015.
In its Economic Monitor for 2014, it however warned that domestic demand, the main engine of growth of the Malaysian economy, to face headwinds.
“With foreign demand absorbing more than half of domestic value-added, a better external outlook outweighs domestic headwinds.”
In terms of investments, it said improved global conditions and the approval of the Pengerang Integrated Complex will result in further growth in investments – as well as growth in capital goods imports.
On the government’s fiscal consolidation plans, the World Bank said the subsidy bill needs to be reduced and emolument (wages, pensions and gratuities) growth capped to enable it to meet the 3.5 per cent of GDP deficit for 2014.
“Fiscal consolidation will have to take place through spending restraint rather than revenue gains.”
Although the Goods and Services Tax (GST) is likely to provide additional revenues starting in 2015, it would be limited especially with additional tax breaks that are coming and pressures to delay further adjustments to administered prices.
GST is expected to eventually broaden the tax base and diversify it from oil revenues, ensuring greater revenues in the medium-term.
The World Bank also expressed concern with the central bank’s efforts to contain the household debt which continued to climb to 86.5 per cent in 2013 despite its macro-prudential regulations.
With the increase in inflation rates due to the increases to administered prices, this has led the real interest rate to slip into the negative territory.
Higher employment levels and real wage gains in manufacturing together with the full implementation of the minimum wage of RM900 in Peninsular Malaysia and RM800 in Sabah and Sarawak suggest higher labour incomes in the economy.
“Labour force participation and employment came down from a peak, but settled at a higher level likely due to participation by women.”
The World Bank warned that external risks to Malaysia’s outlook may have receded, but have not disappeared.
“The high share of Malaysia’s debt held by foreigners means that volatility in international capital markets would be disruptive.”
As Malaysia undertakes the delicate balancing act of tightening fiscal and monetary policies and leverages the improved global environment, these also involve risks of lowering household spending.
“Boosting exports to fully leverage on the improved external environment is thus critical for sustained growth.”