Malaysia’s economic outlook darkens further

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BNMMalaysia’s central bank on August 21 trimmed the country’s GDP growth forecast to 4.5 to 5 per cent from the previous 5 to six per cent, citing weak external. GDP grew 4.1 per cent in the first quarter of 2013 on a seasonally adjusted basis.

Malaysia’s current account, a broad measure of trade in goods and services, remained positive in the second quarter but shrank by one-third from a year earlier to just $790 million. The current account hasn’t been in deficit since the aftermath of the 1997 Asian financial crisis, but the surplus has been eroding quickly as exports slow and government-led infrastructure spending is eating into the reserves.

Fitch Ratings last month cited the government’s deteriorating finances when it cut Malaysia’s outlook to negative from stable. The current-account surplus was just 1.1 per cent of GDP in the second quarter of 2013, down from 7.9 per cent of GDP at the end of 2012.

Economists are now raising concerns that Malaysia could experience an drop in foreign investments as investors are getting nervous about the country’s fiscal stability. As with its Asian peers India and Indonesia, foreign investment in Malaysia has been hard hit by the mass exodus of money from emerging markets.

The deteriorating trade balance will intensify the pressure on the ringgit, which has already fallen to a 3-year low against the US dollar. But what makes the country particularly vulnerable to international investor sentiment is the fact that investors hold nearly 50 per cent of its bonds, much higher than the 30 per cent on average for emerging markets. Its worsening trade balance has scared foreign investors more, leading them to dump $2.04 billion of Malaysian government bonds in June, the country’s largest-ever outflow in a single month.

Malaysia’s central bank governor, Zeti Akhtar Aziz, said local institutional investors such as the government-backed pension fund and private insurance funds can absorb any selling of Malaysian government securities. She also said the outlook will brighten, a hope shared by policy makers across Asia as the US recovery strengthens and China’s economy shows signs of renewed momentum.

The government is in a position now to improve the fiscal position without disrupting the economy, but this could be difficult. Cutting fuel subsidies, tightening the money supply and releasing big investments in sectors like aviation and real estate will all hurt growth. Adding to this, the government has been weakened in the May elections and now is may find it harder to push through meaningful reform.

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Reading Time: 2 minutes

Malaysia’s central bank on August 21 trimmed the country’s GDP growth forecast to 4.5 to 5 per cent from the previous 5 to six per cent, citing weak external. GDP grew 4.1 per cent in the first quarter of 2013 on a seasonally adjusted basis.

Reading Time: 2 minutes

BNMMalaysia’s central bank on August 21 trimmed the country’s GDP growth forecast to 4.5 to 5 per cent from the previous 5 to six per cent, citing weak external. GDP grew 4.1 per cent in the first quarter of 2013 on a seasonally adjusted basis.

Malaysia’s current account, a broad measure of trade in goods and services, remained positive in the second quarter but shrank by one-third from a year earlier to just $790 million. The current account hasn’t been in deficit since the aftermath of the 1997 Asian financial crisis, but the surplus has been eroding quickly as exports slow and government-led infrastructure spending is eating into the reserves.

Fitch Ratings last month cited the government’s deteriorating finances when it cut Malaysia’s outlook to negative from stable. The current-account surplus was just 1.1 per cent of GDP in the second quarter of 2013, down from 7.9 per cent of GDP at the end of 2012.

Economists are now raising concerns that Malaysia could experience an drop in foreign investments as investors are getting nervous about the country’s fiscal stability. As with its Asian peers India and Indonesia, foreign investment in Malaysia has been hard hit by the mass exodus of money from emerging markets.

The deteriorating trade balance will intensify the pressure on the ringgit, which has already fallen to a 3-year low against the US dollar. But what makes the country particularly vulnerable to international investor sentiment is the fact that investors hold nearly 50 per cent of its bonds, much higher than the 30 per cent on average for emerging markets. Its worsening trade balance has scared foreign investors more, leading them to dump $2.04 billion of Malaysian government bonds in June, the country’s largest-ever outflow in a single month.

Malaysia’s central bank governor, Zeti Akhtar Aziz, said local institutional investors such as the government-backed pension fund and private insurance funds can absorb any selling of Malaysian government securities. She also said the outlook will brighten, a hope shared by policy makers across Asia as the US recovery strengthens and China’s economy shows signs of renewed momentum.

The government is in a position now to improve the fiscal position without disrupting the economy, but this could be difficult. Cutting fuel subsidies, tightening the money supply and releasing big investments in sectors like aviation and real estate will all hurt growth. Adding to this, the government has been weakened in the May elections and now is may find it harder to push through meaningful reform.

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