My Say: Not in crisis but in murky waters

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THE Malaysian economy is treading on a slippery slope.  But how bad is the situation? Is the economy in a state of crisis? No, if one notes that it has not hit negative growth.

Is there a danger defaulting on sovereign debt?  Unlikely, although there are massive foreign capital outflows, the central bank still has adequate reserves to cover any shortfalls.

Does that mean that there is nothing to worry about?  The answer to this question can only be a firm no.

There are several indicators that can only be of deep concern to observers of the Malaysian economy.

For one, the outflow of foreign funds and the sell-off of Malaysian equities by foreigners have been continuing.  Till about the last week of January 2015, foreigners had sold Malaysian equities amounting to about RM2.4 billion. This is on the back of net sales of RM6.9 billion last year.

 No greater signal of a lack of confidence in the Malaysian economy is necessary than this.

The potential for further outflows has not been fully exhausted, nor is the impact of any such outflow going to go unnoticed, should it at all happen.

The fact that about 45% of Malaysian government securities (MGS) are held by foreign interests should not be forgotten. Foreign houses could very well decide to revise their positions on MGS.

Foreigners currently hold about 23% of Malaysian equities, a percentage that could also decline, if unfavourable conditions continue to prevail.  This could result in a moderate amount of volatility in the bond market.

Malaysia's exports have been excellent, surging to RM67.7 billion early in 2015 from RM63.7 billion in December 2014.

The weak ringgit can be expected to help boost exports.  But that, in itself, will not be sufficient to propel the economy out of choppy waters.

Of course, the sharp decline in oil prices has been an important culprit for our present state of woes.  That has been an important reason why confidence in the economy has been shaken.  The impact of the low oil prices has obvious repercussions on government finances.

Obviously, investors fear that the government may not be able to deliver on its earlier promise of cutting the federal fiscal deficit.

A couple of circumstances add to the state of uncertainty.  First, interest rates in the US could rise around mid-2015, making Malaysian financial markets less attractive. Second, there is a general state of gloom in the global economy (with the exception of the US), which, again, does not bode well for Malaysian exports.

Other figures that do not give a shot of confidence are the inflated levels of household debt (87% of GDP) and the equally uninspiring state of public debt, which is without doubt large (54% of GDP).

Foreign observers will not discount the possibility of household debt being transformed into non-performing loans and credit that has to be written off should poor conditions be sustained. If that happens, the economy would take a beating.

With the government being held to its promise to work towards cutting the fiscal deficit, it has one instrument less to manage the economy.  This is a time when fiscal prudence in earlier time periods could be used to justify fiscal deficits in the current period to shore up domestic demand.

But it is not possible to support a large fiscal deficit because international credit rating agencies will not at all be pleased with such a move.

The present allegations regarding the 1MDB project raise doubts about the efficacy of government-linked companies since 1MDB is reported to have borrowings and liabilities of around RM48 billion, accumulated over five years. It also has implications on government contingent liabilities. Although it does point to poor manangement, it does not have the momentum, by itself, to destabilise the economy, even if proven true.

The near-term outlook of the economy may be in murky waters, although the long term is still on solid ground.

Prime Minister Datuk Seri Najib Razak has revised his growth forecast for the year downwards to a range of 4.5% to 5.5%. This is itself admission that there are tough challenges to be overcome, at least for much of the first half of the year.


Dr Shankaran Nambiar is author of The Malaysian Economy:  Rethinking Policies and Purposes.  He is also a senior research fellow at the Malaysian Institute of Economic Research.  The views expressed in this article are his personal views.

 

This article first appeared in Forum, The Edge Malaysia Weekly, on February 16 - 22, 2014.