Malaysia's Disastrous Capital Flight
Money leaves the country on an unprecedented scale
Churches are not the only thing to have been going up in flames in Malaysia. Take a look at the nation's foreign exchange reserves. They fell by close to 25 percent during 2009 according to investment bank UBS even though the country continued to run a huge surplus on the current account of its balance of payments.
Says UBS: "Question: which Asian country had the biggest FX losses in 2009?" The answer is Malaysia and by a very large margin; we estimate that official reserves fell by well more than one quarter on a valuation-adjusted basis". It describes the situation as "bizarre" and contrasts Malaysia with other countries with large current account surpluses – Thailand, China, Taiwan, Singapore, and Hong Kong – which have seen their reserves increase – as should be expected.
In short there has been an exodus of money from Malaysia on a scale which surpasses that which occurred during the Asian crisis. Nor is this just a mirage. The decline is also reflected in a sudden decline in base money supply – even while, thanks to Bank Negara, broader M2 has continued to grow modestly.
Who is responsible for this massive outflow? And where has it gone? The questions cannot be answered from the data and probably will not be by a government that knows its own state-controlled enterprises, headed by Petronas, may probably be responsible for part of it. The more certain reason however is the outflow of local private capital has been taking place on an unprecedented scale in response to political instability, massive official corruption and discrimination against non-Malays.
This capital bloodletting has as yet attracted little attention because Malaysia's foreign debt levels had declined dramatically since the Asian crisis and its reserves reached very healthy levels. So the outflow has not disturbed the financial markets, and Bank Negara has easily been able to keep interest rates low and the currency strong.
But unlike 1998, when the exodus of hot foreign money was a major contributor to the crisis, foreigners cannot be blamed. There is little speculative interest in the ringgit and the Malaysian bourse has rather fallen off the map as far as foreign institutional money is concerned. The BRICs, India, China, Russia, Brazil have taken the merging market lead once dominated by Southeast Asia.
Nor is there much evidence that the Middle East money which was supposed to be flowing into Muslim Malaysia, into holiday apartments or Johor's massive Iskandar development zone, has been much in evidence. Malaysia's one recent success, the development of its sukuk (Islamic bond) market may have caused more capital outflow than inflow. At any rate any overall net inflow of foreign capital whether into bonds, equities, factories or real estate has been dwarfed by the exodus of Malaysian money.
The latter is reflected in the weakness of private sector investment, which now trails public investment. Indeed it explains why the economy remains weak despite very healthy prices for most of Malaysia's commodity exports. The nation has been running a current account surplus of more than 10 percent of gross domestic product for the past decade and hit about 17 percent of GDP in the year just ended. Initially this surplus was needed to pay down debt accumulated during the mid-1990s Mahathir boom years and to rebuild foreign exchange reserves to healthy levels.
But subsequently it became simply a consequence of the weakness of private investment. Domestic investors were discouraged by the corrupt and warped system and foreigners moved to China and elsewhere. GDP growth has become ever reliant on government stimulus – again racially biased in its allocation -- financed by a persistently large budget deficit. Read more.