26 April 2012
Malaysia warned that the significant increase in household indebtedness needs close monitoring - International Monetary Fund (IMF)
OPENING the financial books to scrutiny by the international organisations like the International Monetary Fund (IMF) or World Bank shows that Malaysia is not afraid to share the state of its finances with the rest of the world.
RAM Holdings' chief economist Dr Yeah Kim Leng said the move should be welcomed as it raised transparency which will lead to better governance.
This would, in turn, lead to increased public confidence, he said.
International lending bodies like the World Bank, he said, are concerned when government debt rise above 60 per cent of the gross domestic product.
According to the IMF, the Financial Sector Assessment Program assesses three key components in all countries: the soundness of banks and other financial institutions, including through stress tests; the quality of bank, insurance, and financial market supervision; and the ability of supervisors, policymakers, and financial safety nets to respond effectively in case of a crisis.
For 2012, the financial health of Malaysia and 17 other countries are being scrutinised to spot potential troubles on the horizon.
The IMF will then produce a detailed report that includes recommendations for the country on how to improve its financial stability.
Although, Malaysia does not have much borrowing from the International Monetary Fund or the World Bank, an indication of its good financial health at the moment, it must watch out for any growing risks.
Recent studies by both international organisations have underlined the risks if Malaysia does not address the structural issues, said Tan Sri Ramon Navaratnam who is the Asli Centre of Public Policy Studies chairman.
"Our balance of payments is not in deficit and we are not in a dire need of IMF's assistance now but we have to watch out for the early symptoms unless structural changes are made."
In February the IMF, in its annual Article IV consultation with Malaysia, said that while the country is well-positioned to face the challenging environment, public finances and structural reforms were crucial for a more balanced growth.
Although there are no signs of overheating or asset price excesses, household debt, however, has continued to climb, with growth in unsecured personal lending particularly strong.
The IMF warned that the significant increase in household indebtedness needs close monitoring and towards this end, welcomed the prudent measures taken recently, including the introduction of guidelines to ensure that borrowers' debts are in line with their incomes.
On reducing high public debt, the IMF also recommended further efforts to better target expenditure, broaden the tax base, and enhance the country's fiscal transparency.
In addition, the World Bank also said recently that the challenge was to expedite the implementation of structural reforms which was key to transforming the economy into a high-income one.
Implementation can be assisted by increasing the coordination of related reform efforts such as safety nets and education, building capacity within the civil service to lead reforms, and working towards consensus in key areas such as educational reform, subsidy rationalisation and broadening the tax base.