July 30, 2012
KUALA LUMPUR, July 30 — 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 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.
File
photo of people buying fruit at a market in Kuala Lumpur. A consultancy
said the Malaysian economy was very vulnerable and exposed to global
forces. —Reuters pic
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.
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