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Hidden Traps In Malaysia’s Balance Of Payments!
Malaysia Perspective | 26 March 2012

By Yang Ming Wan

Since suffering a small deficit of more than RM 2.6 billion in our balance of payments (BoP) two years ago, Malaysia’s BoP last year reported a substantial improvement with a surplus of RM94.8 billion. On the surface, this is a very remarkable success, and our international BoP seems rock solid.

A closer reading behind this beautiful figure reveals a worrisome situation, fraught with many dangers and traps. With the risk of a repeat of the BoP deficit of 2010 still present, the RM94.8 billion surplus is not any safer than the tiny RM2.6 billion deficit.
Services account in reversal

First and foremost, our current account is still in surplus. Though we are nowhere near the RM112.1 billion of 2009, we still achieved a surplus of RM97.9 billion, which is slightly higher than the RM88.1 billion in 2010. The fact that we are approaching the hundred billion mark bodes well for our performance.

Next, we turn our scrutiny to the most important entries in the current account – trades and services accounts: the trades account remains healthy. After a 5 percent drop in 2010, it rebounded strongly by about 11 percent to more than RM149.4 billion. A truly stellar performance indeed.

However, the equally important services account is already showing worrisome signs. The surplus in this account has been dwindling over the past years. It barely managed to clock in RM1.7 billion the year before, but last year it fell unfortunately into a deficit of more than RM 8.4 billion. The services account has usually fared far less spectacularly than the trades account, but we cannot afford to ignore its plight, for it will be a stubborn thorn at the side of our BoP if not dealt with properly. We suffered its consequences in the 1980′s, when our BoP was in a bad state. Little did we expect history to repeat itself, and the situation now is not good.

Sharp drop in tourism surplus

Since the Government started strengthening our tourism industry in the 1990s, the services account had been reaping a healthy harvest, which helped to offset the stubborn deficit in the freight and transport sector. The freight and transport sector suffered a 36 percent plunge in 2010, followed by a further widening of its deficit last year by nearly 9 percent to RM25.2 billion in the red.

Even as the freight and transport account deficit continues to widen, the surplus in our tourism account suffered a sharp fall of more than 27 percent, from over RM33.3 billion in 2010 to only RM24.3 billion last year, far below the RM30 billion mark.

Apart from attributing this sharp fall in tourism account surplus to a 5 percent drop in the income from foreign visitors – from RM58.9 billion to RM55.9 billion – more importantly, Malaysians have been spending more abroad, from RM38.2 billion of the year before to more than RM40 billion. This is the first time Malaysians’ overseas spending crossed the RM40 billion mark, with most of these going to overseas study costs. This reflects the rising trend of Malaysians studying abroad.

Hot money flooding the market

In addition to the current account, our financial account is also looking good – after suffering a RM19.8 billion deficit in 2010, our financial account returned to a surplus of nearly RM15.5 billion last year.

A careful review of the flow pattern of the various funds revealed that the productivity-centered direct investments are still in the red by RM12.4 billion.What contributed to the surplus then, is the huge RM30.3 billion in net portfolio funds. This reflects a very unhealthy situation for our financial account, and marks the second consecutive year in which our market is flushed with portfolio funds. At its peak in 2010, RM48.5 billion worth of net portfolio funds flooded our market; last year saw only a slight drop in this number, yet it became the main pillar propping up our financial account. Once this investments’ hot money is withdrawn from the market, Malaysia’s international BoP financial accounts will be reversed into a deficit status at any time.

Our senior government officials have always pointed out that the direct investment capital flowing into Malaysia last year was as much as RM32.9 billion, the highest amount ever. However, along with this record capital inflow, the outflow of our local direct investments also reached a record high of RM45.3 billion. This creates a net deficit of RM12.4 billion in our direct investments account, and we are relying on portfolio funds to make our financial accounts look good. Even though it looks good to claim an international BoP surplus of nearly RM100 billion, dangerous traps lurk under the surface and we need to do something about them.

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