Capital outflows cloud Malaysian outlook
By Anil Netto
PENANG - Although Malaysia appears to have weathered the worst of the global
economic slowdown, indications of a recovery are tentative and clouded by a
worrying trend of net foreign investment (FDI) outflows as foreign companies
shy from new commitments and local ones seek opportunities abroad.
Malaysian gross domestic product (GDP) contracted 3.9% year on year in the
second quarter, an improvement on the 6.2% collapse recorded in the first
quarter. With exports representing as much as 120% of Malaysia's GDP, the slump
in global demand and commodity prices has taken an especially heavy toll on
Malaysian producers.
The improved performance was driven by two government economic stimulus
packages - one launched in November 2008
and a larger package in March. The economy is now expected to contract by 3%-4%
this year and in line with global up-trends is projected to expand between
3%-4% in 2010.
Economists say much will depend on the implementation of the fiscal packages
during the second half of 2009 and the extent of the revival of local
consumption and external demand, especially in the US, Japan and Europe. At the
same time, concerns are rising about the fiscal deficit, which is on schedule
to rise to 7.6% of GDP in 2009, up significantly from just 4.8% last year.
Central government debt as a percentage of GDP rose to 48% in June, leading to
the country's first local currency debt downgrade since the 1997-98 Asian
financial crisis. The banking system for now seems sound, buoyed by nascent
signs that consumer and business sentiment is starting to pick up.
International reserves are at a healthy nine months of retained imports.
While inflation has eased and exports have recently improved month-on-month, a
sustained slump in external demand for electronics and electrical goods, a
major component of Malaysia's total exports, raises questions about the
recovery's sustainability. Exports of electrical and electronic products fell
by 20% year-on-year in the first half of 2009, contributing to weakness in
domestic investment and consumption.
The experience of individual electronic companies operating in Penang, a hub
for electronics production, bears this out. "We are looking at a downturn in
revenue of 30%," said a senior manager with a US multinational electronics
corporation operating here. "Our last quarter was the rock bottom. Things
should get better, but they will never be the same again. We have revised our
assumptions for the future as we are now working on a lower-revenue model."
That lower-revenue model includes a reduced workforce.
"I would imagine many of the other electronics firms in Penang are experiencing
similar difficulties," said the manager, pointing out that even before the
global downturn electronics was a mature industry compared with younger ones
now involved in green technologies that are enjoying brisk business.
The government has responded to flagging exports and rising unemployment by
easing monetary policy, resulting in a 5.2% depreciation of the Malaysian
ringgit against the US dollar in the first quarter of this year. The ringgit
has since bounced back, appreciating 3.6% through the end of August due to a
global easing in risk aversion following signs of stabilization of some US
economic indicators, and growing confidence that the global economic downturn
has bottomed out, according to the Asian Development Bank.
One private investment analyst told Asia Times Online that there has been talk
in the market that the ringgit is still undervalued. He believes the central
bank has aimed to keep exports buoyant through a currency depreciation relative
to neighboring countries. That approach, he contends, simultaneously serves as
a disincentive for manufacturers to innovate, add to the design component of
their finished goods, or move up the manufacturing value-added chain.
If the ringgit were allowed to strengthen more against the US dollar and
currencies in the region, the subsequent easing of inflation could start a
deflationary cycle, predicts Subramaniam Pillay, an associate professor at
Nottingham University's Malaysia campus specializing in international finance.
"A deflationary cycle could slow growth - as people put off purchases in
anticipation of falling prices - like what happened in Japan," he said. "So
there's good reason not to allow the ringgit to strengthen too much."
A bigger concern is falling foreign investment flows, as Malaysia lagged
Southeast Asia competitors Thailand, Indonesia and Singapore in attracting new
FDI in 2008. The release last week of the United Nations Conference on Trade
and Development's "World Investment Report 2009" showed that Malaysia
experienced a US$6 billion net outflow of foreign direct investment in 2008.
That built on the $2.7 billion FDI outflow seen in 2007.
The government has sought to put a positive spin on the capital flight, which
has hit the electronics and metal products industries hardest. "The sizeable
increase in Malaysia's outward investment in 2008, as in previous years, is a
reflection of Malaysia's more globalized and integrated position in the world
economy," said Zainal Aznam Yusof, a council member at the National Economic
Advisory Council.
Some analysts doubt whether Malaysian companies have emerged from the global
crisis as more important actors on the global FDI scene and believe falling
investment figures reflect declining foreign investor sentiment towards
Malaysia vis-a-vis its cheaper neighbors.
In comparison, last year neighboring Indonesia saw a net inflow of $2 billion
while Thailand posted a net inflow of $7.3 billion. Both countries compete with
Malaysia for export markets, particularly in commodities and electronics
manufactures. The Southeast Asian region as a whole saw a net inflow of $27.8
billion in 2008.
Capital outflows from Malaysia have continued into this year. Bank Negara's
financial account figures showed that direct investments abroad by Malaysian
companies exceeded direct investments into Malaysia by 4.9 billion ringgit
(US$1.4 billion) in the first half of 2009. Net portfolio and financial
derivative inflows were negative to the tune of 22.1 billion ringgit, while
other investments recorded a negative 27 billion ringgit over the same period.
"The outflow shows that investors, including Malaysian firms, find investment
opportunities not so good in Malaysia and that's why they are moving abroad,"
said Subramaniam. "The government has to look into why they are not finding it
attractive to invest here despite the risk involved in moving their funds
abroad."
Last year, approved foreign investment slumped to $3.0 billion in the first
half of 2009, compared with $13.3 billion for the whole of 2008, according to
the Malaysia Industrial Development Authority. It's not just foreign investment
that has fallen: approved new domestic projects dropped to $1.5 billion in the
first half this year, compared with the already low $4.8 billion for the whole
of 2008.
To counter that falling trend, the government in April announced a raft of
liberalization measures for 27 service sector industries, including financial
and insurance segments, which would be opened to foreign investment. In June,
the so-called bumiputra equity requirement, where all companies by law must
reserve 30% of their equity for ethnic Malays, was removed for newly listed
companies. Yet the latest statistics show capital is leaving rather than
entering the country.
Anil Netto is a writer based in Penang, Malaysia.
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