KUALA LUMPUR, Aug 23 ― Malaysia’s uncanny ability to stave off the global economic slowdown may have run its course.
Once seemingly unaffected by the economic storm ravaging the world’s developing nations, it is now running into the same problems ailing other emerging markets and faces the risk of the anticipated capital flight once the US Federal Reserve cuts back on its stimulus, according to US daily the Wall Street Journal.
“Very few countries have been able to buck the trend,” Edwin Gutierrez, an emerging-market portfolio manager at Aberdeen Asset Management, was quoted as saying by the WSJ.
“There are very few [countries] that are actually being spared.”
Malaysia has hitherto been able to point to above-average economic growth of over 5 per cent annually and a healthy current account surplus.
But falling exports leading to a feared trade deficit — the first for Malaysia since the Asian financial crisis of 1997 — has sent the country into the ranks of the economic laggards among rising markets.
Malaysia’s current-account surplus narrowed to RM900 million in the second quarter from RM8.7 billion in the preceding period, according to a Bloomberg survey Wednesday. This is its lowest level since the 1997 crisis 16 years ago.
Under normal circumstance, this would not be dire, but against the backdrop of a large-scale withdrawal of foreign funds that is expected to be sparked off the Fed’s move to cut back on bond-buying, Malaysia is particularly vulnerable.
Malaysia is seen as being at greater risk to fleeing capital as foreigners hold more than half of all its bonds, markedly more than the 30 per cent average in emerging markets.
On Wednesday, leaked minutes of a US Fed meeting showed that it was set to hit the brakes on its US$85 billion (RM280 billion) bonds purchasing scheme, triggering concerns in emerging markets.
Asian markets, primarily Indonesia, Thailand and the Philippines, shed over 6 per cent in value, while Bursa Malaysia lost nearly 2 per cent in equity the same day.
The similarities to the Asian financial crisis are not lost on observers; Indonesia and Thailand were the first neighbouring economies to go under during the ‘97 crash, and some fear they may again be leading the region down the same path.
Already, the ringgit is showing the signs of a battering on the foreign exchange front, falling to a three-year low against the US dollar. It is now worth 7 per cent less against the greenback than it was at the start of the year.
The timing of it all is inopportune for Putrajaya, to say the least.
Last month, it was put on alert by ratings agency Fitch Ratings, which cut Malaysia’s sovereign debt outlook over what it said were slow reforms amid mounting liability pile.
The government must now work to grow the country’s tax base while trimming national debt — already straining against the legal limit of 55 per cent of gross domestic product (GDP) — to stave off a full-blown credit ratings cut.
A household debt level of around 85 per cent of GDP also limits Malaysia’s ability to turn on the domestic consumption tap to make up for the anticipated exports shortfall.
Still, it is not all doom and gloom for the economy.
Tom Nakamura, a portfolio manager at Toronto-based investment manager AGF, told the WSJ that he rates Malaysia as the best EM in Asia, and that he expects Putrajaya to turn things around within three years.
“Malaysia’s been on a good path for several years. We may run into a few bumps along the way, but we think the government can get back on track with structural reforms and see economic improvement,” he said.