Since I am living in Malaysia now, I pay attention to Malaysia’s economy. There are many reasons to be positive but the large consumer and government debt in Malaysia is a serious concern. They do have many administrators that say the right things, the question is going to be whether those statement define policy action or if they are ignored.
India and Indonesia have experienced large stock market declines and currency devaluations recently. The Malaysian Ringgit has declines 10% against the US $ in the last 3 months. Malaysia is holding up ok, but is venerable as these international loses of confidence often sweep over countries (and move from country to country).
There is a real risk that the current account could slip into a deficit for the first time since the fourth quarter of 1997, Macquarie Group Ltd. analysts said in a report this month.
“We are aware of this situation and we are aware of some of the measures to be undertaken to make sure that Malaysia remains in a surplus position,” Abdul Wahid said, without elaborating on the steps. “It is still a surplus and we are managing it.”
The surplus is narrowing on increased overseas investment and property buying, higher imports for infrastructure projects, lower palm oil and rubber export prices and the acquisition of new aircraft by Malaysian Airline System Bhd., the minister said.
The main foreign exchange earner recently seems to be selling property, that isn’t a good way to be earning foreign currency (selling assets). It is ok to do this to some extent, but relying on large inflows this way is very risky (and self defeating over the long term if it is too large). Even though palm oil and rubber exports are declining a bit, I believe they are still strong sources of foreign currency so that is good.
The subsidy bill “is not sustainable,” Abdul Wahid said. The government spent 24 billion ringgit last year on fuel subsidies for consumers and industries, he said. It also ensured some food items were available below market price.
“The issue is how to address the subsidies in a manner that is acceptable to the people so that it doesn’t present a shock to the economy,” the minister said. Assistance will be made more targeted toward the poor, he said, without providing details.
People shouldn’t worry too much about short-term market swings, the minister said. “If you fix the fundamentals, the short-term fluctuations will take care of themselves.”
I agree completely with his last statement. The issue is fixing the fundamentals. The statement can also be made that if you don’t fix the fundamentals short term market declines are the indication of the beginning of long term market declines. The critical point is fixing the fundamental problems and in Malaysia the most likely top of those fundamental issues is reducing debt levels (for the government and consumers). Fix that, at the other strengths of Malaysia’s economy will likely create a very positive future.
Large foreign ownership of debt is also risky, as those foreigners can pull out investments quickly. Investment sentiments change quickly and it is easy for fearful investors to overreact (especially with funds they have invested in other countries).
Related: Malaysian Economy Continues to Expand, Budget Deficits Remain High – Pursuing a Growing Economy While Avoiding the Pitfalls That Befall to Many Middle Income Countries – GDP Growth Per Capita for Selected Countries from 1970 to 2010 (Malaysia, Singapore, Korea, Indonesia…)