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Concerns Behind The High In-And Out-Flow Of Funds
Malaysia Perspective | 25 August 2011
By:

By Yang Ming Wan

Minister of International Trade and Industry Dato Sri Mustapa expressed his confidence that this year’s inflow of foreign direct investments (FDI) into Malaysia will reach US$10 billion (or about RM30 billion), surpassing last year’s US$9.1 billion (about RM 27.3 billion) to set a new historic high.

Dato Mustapa made this prediction based on Malaysia’s Foreign Direct Investment inflows in the first quarter of this year, following the United Nations World Investment Report 2011 that was released at the United Nations Conference on Trade and Development (UNCTAD), which reported that Malaysia’s FDI inflows last year surged 5.36% over the previous year to reach a record high level.

Funds Outflow More Than Doubled
He is right in one sense, for in Q1 this year, Malaysia’s FDI inflows indeed reached as high as US$3.7 billion (about RM11.1 billion), accounting for 40.6% of last year’s full-year FDI inflows. However, outbound funds by local investors was still as high as RM 10.1 billion, offsetting the inflows to yield a net inflow of FDI of less than 10% or just over RM 900 million.

Local funds outflow in Q1 this year has grown by 1.75 times more than the RM 3.7 billion of Q1 last year and was roughly in line with the RM 10.7 billion quarterly average of last year.

In terms of the recipients of these outbound funds, Malaysia’s focus in Q1 this year, as in the past, is still Southeast Asia, particularly Singapore and Indonesia, which received 15.4% and 13.4% respectively of the total outbound funds. Incidentally, these two countries were also ranked top 2 last year among Southeast Asian countries for attracting foreign investments, edging ahead of Malaysia’s No. 3 ranking.

Competing with Indonesia and Vietnam
Singapore is the undisputed regional financial centre, so it is not surprising that it attracted US$38.6 billion (about RM115.8 billion) of FDI last year. However, this figure is more than 3 times of the US$9.1 billion that Malaysia had attracted, a yawning gap that would prove almost insurmountable for us.

Indonesia attracted US$13.3 billion (about RM39.9 billion) of FDI last year, surpassing Malaysia’s efforts by more than 46%. Even Vietnam, which currently ranks behind Malaysia, attracted nearly US$8.2 billion (about RM24.5 billion), trailing behind by only 11%. This clearly shows that countries which had worse investment environments than Malaysia in the past has made great strides in improving themselves, and Malaysia cannot afford to ignore them anymore. They will not only become competitors for foreign investments, but also magnets to our domestic funds.

According to Bank Negara, Malaysia’s overseas direct investments last year amounted to more than RM42.9 billion, which is equivalent to 1.57 times of the RM27.3 billion in total FDI. Even though we attracted a record amount in FDI, our own direct investments overseas is also at an all-time high.

From an optimistic perspective, this is cause for a double celebration, for on the one hand it reflects our favourable investment environment to attract record levels of investments, while on the other hand it demonstrates our nation’s strength and ability to invest generously in foreign countries. However, the fact that funds outflow outweighs inflow by more than double bodes ill for the much-needed funds for the transformation of Malaysian economy.

Balance needed for domestic transformation and external expansion
Domestic capital flight is not necessarily bad news, yet the authorities’ aversion to mentioning it is cause for suspicion. In the past, during the financial tsunami in 2008, nearly one-third of Malaysia’s total cumulative overseas investments were in the oil and gas sector, followed by the banking and financial services sector, which constituted about 24% of total overseas investments.

In Q1 this year, our overseas investments have shown significant changes in their direction: of the latest total overseas investment figures, wholesale and retail sector ranked top with 28.2%, followed closely by the banking and financial services sector with more than 24%, while oil and gas sector rounded out 3rd with more than 20%.

With the sales and marketing sectors leading our overseas investment thrust, this is good for our exports in the long run, and we’re heading in the right direction. With the banking sector following closely behind, this combination is even more favourable for trade and economic developments. However, we will need to strike a balance between the needs of our domestic economic transformation and that of overseas expansion, so as not to fall flat on both counts.


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