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Huge Capital Movements Cause For Concern
Malaysia Perspective | 17 December 2012

By Yang Ming Wan
Amidst the vagaries of overseas financial markets, Malaysia is also facing the situation of wild swings in out-bound capital flows. The country’s international balance of payments went into deficit in the first quarter of this year for the first time since 2010. In the second quarter, the situation improved dramatically to a surplus of over RM 10 billion before plunging headlong into the red again in the third quarter.

According to a report from the Department of Statistics, as of end-September this year, the nation faces another RM 2 billion deficit in its international balance of payments. Compared to the nearly RM 88.5 billion in trade surplus over the same period last year, this represents a shortfall of RM 90.5 billion. If the situation continues to deteriorate over the last quarter of this year, the two-year swing gap could go up to RM 100 billion.

International balance of payments back in the red
With the Euro zone debt crisis yet to blow over and the uncertainty over the budget deficit and monetary policy in the US, Malaysia’s capital movement this year oscillated between deficit and surplus. At first, the country suffered a deficit of more than RM 7.2 billion in its balance of payments in the first quarter; but recovered quickly in the second quarter to register nearly RM 12.7 billion in surplus. Yet, in the recently-released figures for the third quarter, it swung back to a deficit of RM 7.5 billion. After swinging back and forth to the tune of RM 27.4 billion in total, the country eventually ended its third quarter in the red.

If this disastrous back and forth swing persists, it will have a detrimental impact on Malaysia’s long-term economic growth.

The latest figures show that most items in the country’s balance of payments accounts performed badly. Exports were hard hit by the waning external demands. Even though it maintained a surplus in its exports-driven current account, this figure has been shaved by half as of end-September this year, registering only RM 37.2 billion as compared to RM 74.7 billion over the same period last year.

Then there is a net outflow of RM 13.6 billion of funds in the nation’s capital current account, as a result of an outflow of direct capital and other funds. This may be good in the short-term, but if this outflowing trend continues in the long-term, it may lead to a nightmare scenario of a net inflow of RM 47.9 billion in portfolio funds. It seems the country is caught unwittingly in a lose-lose situation.

Net inflow of RM 47.9 billion into the capital market
Changes in direct investments in its financial accounts have always been at the heart of Malaysia’s headaches. The country’s out-bound investments have consistently been higher than in bound foreign direct investments, which explains why this account has persistently been in deficit.

As of end-September this year, foreign direct investments in Malaysia amounted to about RM 23.2 billion, a sharp drop of 23% from more than RM 30.1 billion over the same period last year. At the same time, the country’s direct investments overseas hit RM 27.1 billion. This means our direct investments account continues to face a net outflow of more than RM 3.9 billion.

Of all the various types of capital flow, one of the only two types that registered a net inflow, and a strong one at that, was portfolio funds, which came up to over RM 47.9 billion. The other type of capital inflow was from derivatives, which is considered similar to portfolio funds, and they came up to over RM 800 million. These two types of funds combined to represent as much as RM 48.7 billion floating around Malaysia’s domestic funds and the financial market.

Over the past three quarters this year, we have seen portfolio funds moving back and forth many times. We saw a net inflow of RM 25.3 billion in the first quarter, followed by a net outflow of nearly RM 5 billion in the second quarter, and a net inflow of nearly RM 27.6 billion in the third quarter. Since the net inflow amounts in the first and third quarters far outpace the second quarter’s net outflow amount,the country is still faced with a huge amount in gross net inflows.

Productive investments sharply down
In the face of the massive net inflow of portfolio and derivative funds and a net outflow in direct investment funds, other investments that sit somewhere in between these two extremes registered a net outflow of more than RM 58.3 billion. The most notable of which is in the private sector net outflow of more than RM 57.5 billion, while the public sector saw about RM 800 million in net capital outflow.
This means that of the in-place capital flow, the outflow of direct capital and other funds amounts to as much as RM 85.5 billion. This bodes ill for Malaysia in the face of the ongoing economic transformation process.

Looking ahead, the Malaysian Industrial Development Authority announced that the latest amount of approved manufacturing investments as of end-August this year came up to nearly RM 29.8 billion. This figure is significantly lower, by about 17% to be precise, than the RM 35.8 billion over the same period last year. Among which, foreign investments fell sharply by 25% from RM 19.4 billion to RM 14.6 billion.

These figures indicate that productive investments are falling sharply. This is going to be Malaysia’s biggest worry in the future development of the its economy.

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