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Turbulent Capital Flows Difficult To Stabilise
Malaysia Perspective | 28 September 2012

By Yang Ming Wan

Before the Euro zone debt crisis could subside, a string of bad news about the Spanish economy started bombarding the market, sparking fears of a Greece-style threat to withdraw from the Euro zone being re-enacted in Spain. In the midst of the panic, US Federal Reserves’ Chairman, Bernanke hinted at a new round of quantitative easing of his government’s monetary policy.

If what Bernanke hinted at indeed becomes reality, and the United States really started printing more money, the greenback will surely depreciate. European and American portfolio funds will be redirected into Asian markets, including Malaysia, and that would threaten to further destabilise the country’s international balance of payments, which had seen some wild fluctuations in recent years.

Sudden switch from deficit to surplus
Since Malaysia’s international balance of payments for the first quarter of this year went into a deficit of RM 7.2 billion for the first time since 2010, the situation had reversed rapidly in the second quarter of this year with a surplus of RM 12.7 billion. Thus, the country’s net trade surplus for the first half of the year stands at RM 5.5 billion. 

Between one quarter and the next, the switch from deficit to surplus actually involved roughly RM 19.9 billion. The actual capital flow in the various accounts is certainly far more than this number.

Rapid changes in the situations abroad rattled Malaysia’s international balance of payments in an uneasy way. As a result of the huge deficit of RM 19.6 billion in the first quarter the year before last, the deficit for the whole year was in excess of RM 2.6 billion, despite a gradual improvement over the following quarters. Fortunately, the deficit in the first quarter this year fell short of the RM 10 billion mark, and the country even registered a surplus in the second quarter. If America does indeed implement QE2, Malaysia will see an influx of short-term speculative portfolio capital, which will ensure that the nation’s international payments would continue to be in surplus.

However, if the Euro zone crisis makes a turn for the worse at this juncture, these short-term speculative funds will be quickly withdrawn from the market. That would plunge the international balance of payments back into the red.

Outflows influencing direct funds
In terms of Malaysia’s capital flow, the country has not been able to stabilise its financial accounts in recent years, mainly due to the inflow of direct investment funds frequently being offset by the outflow of direct investment capitals. FDI inflows in the first quarter this year amounted to about RM 7.5 billion, but no thanks to the RM 16.9 billion in outflow of direct investment funds, its net direct capital was in effect in the red.

The country managed to recover quickly in the second quarter, not because of an increase in inflow of foreign capital, but because of a drop in the outflow of direct investment funds. In fact, the FDI inflows in the second quarter amounted to only about RM 6.1 billion, RM 1.4 billion or 18.5% less than the first quarter. FDI outflow was just over RM 2.5 billion, up to RM 14.4 billion or 85% less than in the first quarter. This gave the second quarter a sufficient base for the country’s capital and financial accounts to shake off the previous deficit while restoring the overall international balance of payments back to a surplus.

Current accounts showing deepening cracks
In addition to the worrisome phenomenon of a steady outflow of direct investment capital, Malaysia’s current accounts, which had always enjoyed a healthy surplus, started showing stress fractures in the first quarter, which continued to widen in the second quarter.

Since tumbling into an RM 8 billion deficit last year, the nation’s services accounts continued to wallow in the red over the first two quarters of this year. The deficit figure for the first half of this year came up to about RM 7.4 billion, and is closing in fast on the full year figure of last year. In the face of the struggling European and American economies, a Chinese economy that is in consolidation, and poor export figures in the second quarter, Malaysia’s overall current account manages to remain in surplus, but the buffer has been trimmed by almost half, from RM 18.1 billion to RM 9.6 billion. This is the first time in recent years that the country’s quarterly current account surplus dipped below the RM 10 billion mark.

On the whole, Malaysia’s economic growth looks strong, but dark clouds abound in the form of a highly unstable international balance of payments. At a time when the economic situation abroad is yet to stabilise, this is a noteworthy area for concern. The Government will need to address this issue when it is formulating its long-term economic development strategy.

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