Global Trends by Martin Khor

Monday 17 August 2015

Need to now tackle economic woes

The slide in the ringgit’s level is a symptom of weaknesses in the Malaysian economy which were exposed with recent changes in the global economic conditions, and policy actions must now be taken to address the serious problems.


Last week’s global economics news was dominated by the volatility of the world’s currencies, with Malaysia being one of the most affected countries. 

There were at least three inter-related developments:  the depreciation of the Chinese yuan, the continued strengthening of the US dollar and the rapid slide of the Malaysian ringgit.

For the Malaysian public, the ringgit’s continuous fall has been most worrying.

The ringgit’s steep fall by 20% from 1 September 2014 to 11 August, is considered damaging by most Malaysians.  The negative effects are felt by consumers suffering higher import prices, parents who pay for their children’s education abroad, manufacturers and farmers facing higher costs for imported inputs, and companies that borrowed in US dollars and now have to foot out more ringgit to service their debt.

On the other hand, there are some beneficiaries.  These include exporters who receive their revenue in foreign currency, and producers whose products and services have become cheaper to foreigners, thus boosting their demand and revenues.


Overall the negative effects exceed the positive, since everyone is affected by higher prices of imports, as well as of local goods since their production costs (that include imported inputs) will also rise.  

The ringgit decline is only the most dramatic of the present inter-related adverse economic trends.  These include capital outflow by foreigners, commodity price declines, fall in foreign reserves and deterioration of the balance of payments situation.

An underlying reason is that Malaysia has become very much linked, in trade and finance, to the global economy and its financial systems.  In particular, the country has become more open to global finance than in the 1997-99 crisis period.

In the “good years”, when capital was flowing into Malaysia and other emerging economies, this increased linkage was considered a good thing.  Export dependence was also positive when we enjoyed a commodities boom.

But linkage has two sides.  When the external situation changes, what is good becomes bad. 

Indeed, what was very good becomes very bad.   And unfortunately the tide has now turned decisively.

A paper by the South Centre’s chief economist Yilmaz Akyuz analyses how emerging economies like Malaysia have become more dependent and vulnerable in the financial sector, in new ways, in the last 10 to 15 years. [ ]

In particular, foreign presence in these countries’ domestic credit, bond, equity and property markets has reached unprecentedly high levels, and thus new channels have emerged for the transmission of financial shocks from global boom-bust cycles. 

In another paper on Malaysia, Akyuz examines the ways in which dependence on trade, foreign funds and capital inflows have made the country vulnerable to changes in global economic conditions, resulting in the present economic difficulties.  


Findings of the report include : 

·       Malaysia has recently become more dependent on commodity (rather than manufacturing) exports and thus more vulnerable to trade shocks.  Export earnings have declined (by 8% between April 2014 to April 2015) mainly due to the commodity price falls.

·       The current account enjoyed huge surplus due to the earlier commodity boom, but this declined sharply after 2008.

·       National savings have fallen from around 40% of GDP to 30% as private consumption shot up, and national investment declined from over 40% of GDP to around 25%.     

·       Recent economic growth has been driven by a steep rise in household, government and corporate debt.   

·       There have been great fluctuations in capital flows. Capital inflows were very high, averaging over 10% of GDP in 2010-13, due to high-liquidity and low-interest policies in USA and Europe.  But these flows are weakening or reversing on expectations that the US is about to normalise its monetary policy  

·       Foreign reserves have fallen from US$130 bil in September 2014 to US$97 bil (RM365 bil) on 31 July 2015.  The present level appears, at first sight,  to be adequate in relation to imports and short-term external debt.  However the adequacy has to be reassessed if account is also taken of other relevant factors (vulnerability to outflows of foreign capital in domestic deposit, bond and equity markets, and to local capital flight).

·       The capital inflows in recent  years resulted in a very strong foreign presence in Malaysia’s bond and equity markets, making the country vulnerable to rapid capital outflows, if expectations and conditions change.

·       Non-resident holdings of bonds (public and private)  were RM226 bil at end of 2014, down from a peak of RM257 bil (July 2014), indicating an exit of about RM30 bil.

·       The share of foreign holdings in the stock market was 23.5% at the end of 2014 (according to Bursa Malaysia), indicating a foreign-holding value of around RM400 bil.   According to MIFD Research, there was net cumulative selling of equities by foreigners of RM11.7 bil in Jan-July 2015, surpassing the RM6.9 bil for the entire 2014.

The paper also points out that debt held by locals has built up in recent years to high levels.  Thus, if the country faces challenges on the external front, there may be a significant impact domestically because of the vulnerability of the indebted local sectors.

Debt by households was estimated at 86% of GDP in first quarter 2015 by Merril Lynch.  Household debt is also 150% of disposable income, exceeding the leverage in other developing countries and also the US and several other developed countries.

Public debt is near to 55% of GDP (compared to an average 40% for developing countries covered in a McKinsey report).  And corporate debt is estimated to be about 90-96 percent of GDP.

Overall, total debt rose by 50 percentage points of GDP between 2007 to 2014 (according to a McKinsey report) and the ratio of total debt to GDP was 222% in fourth-quarter 2013, the highest among developing countries.     

Thus, the country has vulnerabilities both at the external front, where the global economic conditions are presently negative, and at the domestic front due among other things to the excessive debt. 

On the other hand, overall economic growth (at 4.9% in second-quarter 2015) has been positive.  Will this growth rate be sustainable in light of the other factors ?

Serious attention must now be paid to the economy’s weakening condition. The decline in the ringgit is the most talked-about symptom. 

But there are also many other aspects. Policies must be considered to address the weaknesses, with pre-emptive and corrective measures for the short-run and more systemic policies for the longer term.

NOTE :  The two papers referred to can be accessed through : and