July 30, 2012
Malaysia is one of most vulnerable countries in case of “perfect storm”, says Roubini Global Economics
by Lee Wei Lian@http://www.themalaysianinsider.com
Malaysia is one of the most vulnerable Asian economies should a “perfect storm” of a disorderly debt default in Europe, a slowdown in China and the US, and rising tensions in the Middle East materialise, Roubini Global Economics (RGE) has said in a recent report.
The strategic research firm, best known for its founder “Dr Doom” Nouriel Roubini (left) who predicted the collapse of the US housing market and the 2008 global financial crisis, said that Malaysia had the highest exposure to a pullout of capital as its eurozone and US bank claims amount to more than 25 per cent of GDP.
RGE added that Malaysia was the second most exposed in terms of a demand slowdown in the US, the eurozone and China, making it the most exposed Asian economy overall.
The report also said that the country was among the lowest ranked in terms of monetary and fiscal capacity to respond to a crisis, coming in ahead of only Thailand, Japan and Indonesia.
“Malaysia, Taiwan, South Korea and Vietnam appear to be the most exposed to a perfect storm through their trade and financial linkages, while South Korea, Australia, Vietnam and the Philippines appear to have the most policy space to offset such an external shock,” said RGE.
“Taking these two factors together, Malaysia, Taiwan, Japan and Thailand are the most vulnerable of the 10 economies considered in this analysis, while Australia, India, South Korea and the Philippines are the least.”
RGE said that while Malaysian government revenues have increased, the hole in its finances could grow due to “populist” spending and an expected cut in Petronas’ dividends.
“In the run-up to elections, the government is likely to offer more cash handouts in the 2013 Budget, leaving fewer resources for productive investment,” said the report.
“We see the debt-to-GDP ratio reaching 54.6 per cent next year, leaving little room to manoeuvre in the event of an external shock.” RGE noted that in its most recent effort to boost its popularity ahead of an upcoming general election, the Malaysian government announced a supplementary budget of RM13.8 billion in June, some 80 per cent of which is allocated towards maintaining oil subsidies and raising civil servant wages.
It added that it expects Bank Negara to cut interest rates to 2.5 per cent by the end of 2013 to deal with slowing growth in Europe and China.
Economists and analysts had earlier said that Malaysia’s federal government debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs the country’s resilience to the increasing frequency of economic shocks.
They said that while government debt — currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia — has not significantly impacted the country and its credit standing so far, the volatile nature of global markets may cause sentiment to turn with little warning.
Figures from the Federal Treasury’s Economic Reports show that the federal government’s domestic debt almost doubled in the space of less than five years — from RM247 billion in 2007 to an estimated RM421 billion in 2011 — far outpacing its revenues which only grew 31 per cent or from RM140 billion to RM183 billion during the same period.
Government-backed loans rose rapidly as well between 1985 and 2010 — from RM11 billion to RM96 billion — representing a growth of 8.7 per cent per annum.
Investors in recent weeks have reportedly shown a preference for US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.
Roubini had in May reportedly predicted that four elements — economic slowdown in the US, the debt crisis in Europe, a slowdown in China and emerging markets, and military conflict in Iran — would combine to create a storm for the global economy in 2013.
We should bring back all our cash and keep it at home (in the country) or better still, buy gold with those money and start stockpiling gold. At, least gold prices do not fluctuate as quickly and as much as any currency.
No problems for Malaysia, say two top Malaysian economists, Idris Jala and Nor Mohamed Yakcop. It is time both of them stop spinning and for the Government to look at its finances closely. This time around the storm could be more severe than in 1998. Our government debt is perilously high.–Din Merican
We had better listen carefully to what people like “Dr. Doom” are saying. He, too, mentiions DEBT as a problem…
Repeat after me… DEBT IS BAD.
I fear for the ordinary hardworking Malaysian whose main preoccupation is to survive day to day with inadequate saving to tie them over a prolong economic downturn should Europe and USA unravel. Our social safety net is hardly in existence and our government is spending like there is no tomorrow. The last i read our national debt is 55% of our GDP and fast rising with yearly 4 to 5% deficit. Our personal debt is 76% our annual income. So when the perfect storm hit and it will be far worse than what we anticipate, Malaysian will be vulnerable to this external risk. Have our government prepared Malaysians adequately to face this potential economic threat?
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How can the average Malaysian Joe be adequately prepared when he is being told by the Government that we have sufficient reserves to weather the perfect storm! Everything is fine.The Government is spending as if there is no tomorrow and it is deluding itself,believing its own spin.–Din Merican
Perhaps those in Government in high places are not too worried or concerned about Increasing Deficits, b’coz Debt escalation will be carried forward for future generations to worry about. The future governments will create more & more Mega projects, to try and cover-up, not realising the Holes become bigger & bigger – they would’nt care because they reap all ‘ fortunes ‘ in dubious ways, so they then pass the buck to the succeeding generations…
Until it becomes one of another Ten Nations that fall, where looting & plunder becomes a way of life : EAT or BE EATEN, by the law of sheer Brute Force…..
Bad omen…..
This time you guys may have to take shade in a cow shelter in order to ride the ‘perfect storm’. Good luck.
Yes, our Sovereign Backed Funds have been investing at a premium in Western Markets over the last decade. The figures must now be out in the public domain.
Malaysia with all its mega projects, IPOs and bond issuances with loans from local UMNO controlled banks could be borrowing from European banks which are in rickety conditions themselves.
If the lending European banks are about to go under, they can recall their bank loans and force the mega projects to brake in Malaysia. Remember, a half completed project has zero value not half the value which will not entail any return.
The Malaysia could see UMNO controlled banks tumbling down even if those banks have been following stringent rules for lending. Mega land development projects like the one in Johore that is headed by Khazanah are likely to be affected.
The European banks will be forced to recall the loans to maintian their high Euro exchange rates. This will avert inflation, and social distrubances in Europe.
Wonder how that UMNO entrepreneur who owes the bank some RM 35 billion will weather the storm. And what will happen to the banks that have loaned him the money.
I can see the house of cards come crumpling down. And who will put back Humpty Dumpty together again?
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