KUALA LUMPUR (Nov 9): To get an idea of how fragile Malaysia's external account is, consider this: the amount of foreign money invested in ringgit bonds and the dollar borrowings of its banks will together more than wipe out the country's currency reserves.
Eighteen years after being battered by the Asian financial crisis, Malaysia is once again facing a perilous combination of heavy short-term overseas borrowings by banks and scarce foreign exchange reserves.
Add in a festering political scandal and looming interest rate rises in the United States and the country is showing many of the symptoms that could presage another currency crisis.
The ringgit has plummeted and credit markets are pricing in deep concern over Malaysia's external finances. Richer Malaysians are slowly shifting money abroad.
"It depends on what will be the catalyst that turns the worry into a crisis," said Patrick Yau, an equity analyst with Citi in Singapore. "The big question is whether there is enough funding to prevent a crisis. The system was over-reliant on foreign funding in the previous crisis."
The foreign currency liabilities of Malaysian banks alone account for nearly half of the country's $98 billion overseas borrowings. Overseas investor holdings of Malaysian central bank and government debt are $47 billion and the country's total short-term debt has doubled since 2009 to $79 billion.
Bankers in Kuala Lumpur say they have learnt their lesson from the 1997 crisis, and thus their foreign currency borrowings are mostly offset by matching dollar lending.
"I think the risk is from the currency volatility," Nazir Razak, chairman of Malaysia's second-largest bank CIMB, told Reuters in an interview.
"The risk would be if the currency depreciation results in a credit event where borrowers really suffer as a result of the drop in currency, wherein they actually have dollar cost basis. That is when, on a second order basis, banks will get affected."
Such heavy overseas borrowing still carries two potential risks, however, according to some analysts.
First, offshore banks or even retail investors could unexpectedly pull back their deposits or funding. At risk would be the $30 billion of deposits placed by foreigners with Malaysian banks.
Second, the assets could turn bad if the businesses that have borrowed the foreign currency cannot repay them.
Either could trigger a vicious downward spiral for the ringgit, which is already down 19 percent against the dollar this year.
In a worst-case scenario, Malaysia's $94 billion foreign currency reserves would fall far short of covering the resulting funding flows.
Back in 1997, the external borrowing binge was led by corporates. Short-term debt was 33 percent of total borrowings of $43.9 billion, while currency reserves were less than $22 billion. The ringgit was overvalued, and Malaysia ran a current account deficit so was hugely dependent on foreign funding.
Now most analysts assume the resource-rich country's current account surplus - its earnings from exports of manufactured goods and liquified natural gas - indemnify it against a balance of payments crunch.
"If it turns into a run, then they don't have enough reserves," said Tim Condon, ING's chief Asia economist. "Still, they don't have to raise money. It's hard to get a balance of payments crisis in a country running a current account surplus."
That surplus has nonetheless shrunk rapidly as global oil prices have tumbled. It is forecast to be just $2.6 billion in 2016, the lowest since Malaysia started running surpluses in 1998.
Meanwhile the ongoing investigations into allegations of corruption and mismanagement at state fund 1Malaysia Development Berhad (1MDB), which has racked up debts of $11 billion, have raised questions around Prime Minister Najib Razak's political future and the stability the country has long been known for.
"Malaysia is facing a number of issues. Individually they are all manageable, but it's a question of how they interact," said Elaine Koh, a director at Fitch Ratings in Singapore.
Koh thinks the banking system is at an inflection point, but says it's difficult to tell whether the situation will worsen.
The simmering policy uncertainty, market volatility and intervention by the central bank have meanwhile led to a fall in ringgit deposits in the banking system.
As businesses and individuals moved out of ringgit, foreign currency deposits at local banks rose $3 billion in the third quarter of this year and $5.7 billion so far this year.
"Fund managers and other institutional investors have been moving funds away from Malaysia," said Simon Chen, a senior analyst at rating agency Moody's in Singapore.
Retail deposits however were still growing at a stable pace and the banking system wasn't showing any signs of funding stress, Chen said.
"If the deposit outflows persist and to the extent that we see retail deposits grow at a smaller pace or even contract, that's when the excess liquidity in the banking system will decline and funding will become tighter."