Hokusai’s The Great Wave (photo credit: The British Museum)
The ringgit has taken a severe beating in the last nine months dropping 16.5% between 1 January and 18 September. Screaming headlines highlight billions of ringgit fleeing the country, a testament to some on how undesirable the Malaysian market must appear to investors.
It is easy to surmise we are facing an economic calamity, except we are nowhere near the levels of the Asian Financial Crisis of 1998.
What we have instead, is a perfect storm battering at our economy – the strengthening US dollar, falling crude oil and commodity prices, and the ripple effects from major economies like China making adjustments. No trading and open economy in this region would be spared the domino effect; and Malaysia is one such economy. To add to this already volatile mix is the cacophony of tense voices stemming from the domestic political space, doing its bit to take a swipe at investor confidence.
But sentiments must not distract from facts – structurally, Malaysia today faces these headwinds from a stronger, more comfortable position than we did previous crises. Our banks are well-capitalised, bond markets are deep and well-developed, and liquidity is not a concern. The Government has assured we will go nowhere near pegging the currency and will not exercise capital controls.
We are not in an economic crisis
At the Economic Update 2015 forum (organised by the Economic Transformation Programme) held on the 21 September, Bank Negara Malaysia (BNM) Governor Tan Sri Dr Zeti Akhtar Aziz (pic) said: “Malaysia has had good growth, one of the best performing economies for more than five years now. Our macroeconomic fundamentals are strong. We have a solid banking sector; not at any period was credit growth disrupted.”
Minister of International Trade & Industry Dato’ Sri Mustapa Mohamed said that Malaysia is a diverse economy, adding that manufacturing exports account for almost 80% of total exports.
“We are not dependent on oil and commodities but for whatever reason, the decline in prices of oil, palm oil and rubber had had a big impact on movements in the markets.”
“As the Malaysian economy becomes increasingly open, sentiments play a very important role. Our bond and stock markets are more sensitive and volatile versus economies that are not as trade-dependent. It’s something going forward, all of us have to be very careful…. In terms of policies, we have to be very prudent because we are probably a little more sensitive than other markets because of the openness of our economy,” Mustapa (pic) said.
Zeti added that being a larger and more developed financial market – Malaysia is largest in South East Asia – invites inflows. “And where there are reversals, we feel more pronounced movements in these flows and more pronounced movements in the exchange rates.”
She pointed out that Malaysia needs to build up strength and resilience so that the country can ride out uncertainties in the United States, the effects of China’s rebalancing exercise and finally, to domestic issues affecting sentiments.
No capital flight, no danger zone
Zeti stressed that Malaysia is not experiencing capital flight but continues to receive foreign direct investments (FDIs). There is capital outflow due to domestic and Government-linked companies investing offshore to diversify their investments.
“Malaysia is a profit centre (for FDIs) and this is manifested in the balance of payments,” she said.
She highlighted that even during the Asian financial crisis, when Malaysia experienced outflows and speculative attacks on the ringgit by foreign speculators, it was one of the countries that did not experience domestic capital flight. “The domestics believed in the policies that we were implementing and they stayed with us. That is why we did not have a collapse in currency,” she said.
Malaysia has been attracting FDIs for more than 100 years, she added.
PEMANDU CEO Dato’ Sri Idris Jala said the country’s private investment has grown steadily since the launch of the Economic Transformation Programme (ETP) in 2010, reflecting the private sector’s confidence in Malaysia’s long-term prospects. Realised private investment increased 2.5 times post-ETP (CAGR between 2011 and 2014 at 13.6% versus 5.5% between 2006 and 2010). For the first half of 2015, private investment stood at RM108.5 billion, contributing 71% of total investment.
While there has been concern about the Malaysian Government’s financial position, the reality is that the country’s fiscal reforms have helped trim its deficit in the past five years. Deficit as a percentage of GDP in 2014 was at 3.4% of GDP compared with 6.4% in 2009, with public debt at 53.7% (end-June 2015) of GDP.
“Our fiscal deficit has reached a point where in global terms, we entered the ‘safe zone’ in 2013 and by 2014, we were well ensconced within the ‘safe zone’.”
The ‘safe zone’ is for countries whose public debt is below 75% of GDP and deficit is at 4% of GDP or below. Public debt equals or above the GDP and deficit of 8% and above places a country in the ‘danger zone’.
The slump in global crude oil prices translate to lower earnings from petroleum and natural gas but the Government has over the last several years put in place measures to consolidate its financial strength, such as subsidy rationalisation and the implementation of the Goods and Services Tax (GST) which came into force this year.
Tax revenue as a result, grew at a compound annual growth rate (CAGR) of 11.9% (2011-2014) compared with 6.3% (2006-2010). For 2015, total tax revenue is estimated at RM183.4 billion, providing the Government with greater fiscal resilience.
The expectation that good times or bad times for that matter, last forever is unrealistic as it is naïve.
Today, we are in the eye of the perfect storm as the country is buffeted by challenges both domestic and external. Even as Malaysia battles balancing sentiments out with solid fundamentals, it is expected to rise above this short-term crunch to continue to compete fiercely as one of Asia’s top investment destination.