CRITICS have been concerned that the country’s external debt rose to RM744.7 billion in 2014, equivalent to 69.6% of gross domestic product (GDP). This was also more than three times the external debt of RM196 billion at the end of 2013.
However, Prime Minister Datuk Seri Najib Razak has said that the apparent bulge in external debt was due to the adoption of a new way of calculation. Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz has also explained that it was in accordance with the latest international best practices, which Malaysia adopted in the first quarter of 2014 (1Q2014).
Under this redefinition of external debt, the spike stems from the “high level of non-resident holdings of ringgit-denominated debt securities”, according to Bank Negara in its first quarterly bulletin for 2014. The amount accounted for about two-thirds of the increase in the country’s external debt, adds the central bank.
If the redefined external debt calculation was also applied in 2013, the country’s external debt would have amounted to RM696.6 billion, or 70.6% of GDP, says the Bank Negara Malaysia Annual Report 2014.
The change in the calculation, says Bank Negara, is meant to better reflect the breadth and depth of the country’s financial markets, which has seen high levels of foreign investors’ participation in domestic debt securities over the past few years.
The rise in foreign participation — which stopped recently — was attributable to the huge foreign fund inflows into the country, spurred by the US Federal Reserves’ quantitative easing (QE) measures that created ample liquidity in the global financial markets. The excess liquidity found its way to Asian financial markets, thanks to the better returns and higher interest rates being offered.
Foreign participation in domestic debt securities, which include Malaysian Government Securities (MGS), Bank Negara monetary notes and other government domestic debt securities and private debt securities, rose from RM70.4 billion in 2009 to RM223.3 billion in 2014. A significant increase was seen in 2010, a year after the global financial crisis, with total foreign holdings in domestic debt securities leaping 68.9% to RM118.9 billion.
While the high foreign participation in domestic debt securities is an indicator of the Malaysian financial market’s increasing breadth and depth, it has also made the market more susceptible to the ebb and flow of foreign funds.
“The vulnerability comes when there is a selldown on the locally denominated bonds. In this case, unlike direct borrowings, it is not about the ability to pay the debt. It is about how the currency could be affected when foreign funds convert the ringgit back into their respective currencies,” explains RHB Research economist Peck Boon Soon.
With the ending of the QE or bond-buying programme last year, many speculate that Malaysia could see another round of massive foreign fund outflows when interest rates in the US start to rise.
AmResearch economist Patricia Oh says Malaysia has experienced the reversal of carry trades since the US started to taper its QE programme. “Going forth, potential ratings downgrades and a slowdown in Malaysia’s domestic economy could lead to greater volatility in the ringgit,” she says.
She explains that the outflow of foreign funds began in mid-2014, as shown in the decrease in foreign holdings of MGS. As at February this year, foreign holdings of MGS totalled RM145.7 billion, accounting for 45.1% of the total outstanding, she says. In comparison, the foreign holdings of MGS last July amounted to RM154 billion, representing 48.3% of total MGS.
Rising private-sector debt
Statistics from Bank Negara reveal that private sector offshore borrowings, from both the banks and non-bank private sectors, have also risen substantially since 2012.
The banking sector’s medium and long-term offshore borrowings has surged 100% from RM18.71 billion in 1Q2012 to RM37.43 billion at end-2014. In comparison, the sector’s short-term debt gained 55.6% to RM139.91 billion for the same period. “This arises from their (banks) efforts to diversify the maturity structure of debt obligations of their funding,” says Bank Negara in its 2014 annual report.
The non-bank private companies’ medium to long-term offshore borrowings increased 77.1% from RM45.37 billion in 1Q2012 to RM80.32 billion at the end of 2014. Their short-term offshore borrowings climbed 46.7% to RM16.29 billion during the same period.
The central bank says the increase in offshore borrowings was due to the low cost of funds available for corporates, favourable borrowing terms and their need to finance expansion of their overseas operations. It adds that the increase in corporate offshore borrowings can also be attributed to the deterioration of the ringgit against the greenback.
“Yes, there has been a pick-up in offshore borrowings for the corporates in the non-banking sector. But as a share of GDP, I don’t think it is that significant,” says RHB’s Peck. He does not expect to see a pick-up in new offshore borrowings this year, given the current weak ringgit. The corporates would have to pay more in interest because of the foreign exchange difference. “The corporates would be more cautious now,” he says.
The concern about the country’s external debt position is centred on the government’s ability to repay its debts. As at March 13, Malaysia’s international reserves stood at US$109.2 billion. This is 17% lower than the US$131.5 billion accumulated on Sept 15, 2014, which was a few weeks after the ringgit started depreciating against the greenback.
Institute Rakyat highlights in an early-March press statement that Malaysia’s reserves to short-term debt ratio stood at two times in 2009. “Our concern is that while our short-term external debt obligations have doubled since the 2008 crisis, now hovering at around US$100 billion, the considerable international reserves we have built up since 2009 has started to drop sharply amid the recent economic turbulence.”
It is worth noting that despite the decline in international reserves, the reverses to short-term external debt ratio was at 1.1 times as at end-2014, above the recommended level of one time. Meanwhile, the overall debt service ratio remains low at 18.2% of exports of goods and services.
That said, Bank Negara maintains that the external debt situation remains manageable and poses a small risk to the economy.
“External debt remains manageable, with the majority of debt being in medium to long-term tenures, and with more than 40% being denominated in ringgit. This, together with ample international reserves, accords the Malaysian economy with the policy flexibility to manage external risks,” it says.
This article first appeared in The Edge Malaysia Weekly, on April 6 - 12, 2015.
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