This is because overall public debt is relatively high due to the continued accumulation of fiscal deficits and increased public infrastructure spending, it says in its 17th Malaysia Economic Monitor, entitled “Turmoil to transformation: 20 years after the Asian financial crisis”.
Another reason for reforms, it says, is the steady expansion of the government’s contingent liabilities since 2009, due largely to increased issuances of sovereign guarantees to facilitate the implementation of major development projects by non-financial public corporations.
“These government liability exposures are likely to expand over the coming years with the incoming flows of large-scale infrastructure commitments such as the East Coast Rail Link and the Kuala Lumpur-Singapore High Speed Rail.
“Managing the associated fiscal risks would call for the continuous monitoring and transparent disclosure of contingent liabilities, along with a comprehensive, orderly, medium-term resolution to gradually unwind guarantees going forward.”
The World Bank notes that although Malaysia has made significant progress since the Asian financial crisis towards building resilience against future shocks, it still faces a number of challenges and risks.
“In particular, Malaysia’s economy has grown significantly (three times larger) since the crisis, and become even more closely integrated into an increasingly volatile global economy. Given debt levels, the balance sheets of households and corporations will need to be monitored for signs of stress.”
It warns that Malaysia could become vulnerable to abrupt tightening of global and domestic conditions if there is a slowdown in growth.
The World Bank is particularly concerned that the rapid increases in the prices of houses since 2008 could be a source of future instability.
“Increases in housing prices can relax borrowing constraints and allow existing homeowners to increase consumption, thereby boosting the economy. However, the rapid increase in prices creates incentives for the construction of new properties, which could potentially lead to a burst in prices and an abrupt adjustment to economic activity.
“This risk warrants close monitoring, especially since prices are still increasing, albeit at a lower rate.”
It gives several suggestions to improve the governance of financial institutions: promote more independent boards; apply more stringent transparency requirements; require timely disclosures (such as assets by board members and managers); and ensure a clear separation of roles between owners and regulators.
The World Bank says the aim of the Malaysia Economic Monitor is to foster better-informed policy analysis and debate regarding the key challenges that Malaysia faces in its endeavor to achieve rapid, inclusive and sustainable economic growth.