Review of Malaysia's external debt; SE Asia draws more FDI investments

Malaysia External Debt Forecasts are projected using an autoregressive integrated moving average (ARIMA) model calibrated using our analysts expectations. We model the past behaviour of Malaysia External Debt using vast amounts of historical data and we adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations. The forecast for - Malaysia External Debt - was last predicted on Tuesday, March 17, 2015.

Putting the finger on external debt

As the country’s situation has become a topic of debate and confusion, it is useful to review and clear the air on the matter.

LAST week there was some confusion over the state of the country’s external debt, but it was to some extent cleared up after an explanation by the Finance Ministry.

It is thus useful to clarify what external debt is, and have an informed discussion on how dependent or vulnerable the country is to external funds and changing conditions.

On March 11 the media reported that the Finance Minister, in a written reply to a Parliamentarian’s question, said Malaysia’s external debt had risen from RM196bil in the final quarter of 2013 to RM740.7bil in the third quarter of 2014.

The reply did say that the sharp increase was due to a new definition in debt reporting which now includes ringgit-denominated debt securities held by foreigners.

However, this nuance was lost amidst the headlines that the country’s external debt had tripled to RM740bil, causing surprise and perhaps a tinge of alarm.

A day later the Finance Ministry issued a statement clarifying the new external debt fi­gures were in line with debt reporting requirements of the IMF, and under the new definition, the external debt now includes holdings of debt securities, deposits and trade credits denominated in ringgit by non-residents, as well as the offshore borrowings by the Government, public enterprises and the private sector.

The high level of non-residents’ holdings of ringgit-denominated debt securities and deposits comprise over 40% of Malaysia’s external debt, and “this is due to the wider depth, openness and attractiveness of the Malaysian financial market”, added the statement.

This should give relief, that the external debt hasn’t jumped three times after all. It was really, mainly, a redefinition issue.

While the jump isn’t so high, this explanation does reveal that the country’s external debt is really much higher than originally thought.

Under the old definition, Malaysia’s external debt was RM328bil in end-March 2014 or 30.5% of Gross Domestic Product.

Using the broader new definition, the debt level had become higher at RM700bil or 65.2% of GDP at the same date, according to Bank Negara’s explanation of the redefinition of external debt, in its Quarterly Bulletin of First Quarter 2014.

The ratio of short-term external debt to exports also jumped from 15% to 39% using the redefined figures.

These figures show that the country is more vulnerable than previously thought, in terms of the share of foreigners in domestic loans and the exposure or risks to changes in conditions that affect foreigners’ perceptions on whether to maintain the holdings of their credit to the country.

The newly defined external debt has increased further to RM744.7bil, or 69.6% of GDP, as at end-December 2014, according to Bank Negara data.

The redefinition exercise is a positive one. It puts the country’s debt reporting in line with international standards, meeting the International Monetary Fund’s requirements.

It also provides a more realistic and accurate view of the true state of the country’s external debt.

Previously, only the loans taken by the Government and private companies from abroad and denominated in US dollars and other foreign currencies were considered to be external debt.

Meanwhile, foreigners have been taking up billions of ringgit worth of Government and corporate bonds issued in Malaysia and denominated in ringgit. These had previously not been considered external debt.

By the end of 2014, non-residents’ holdings of domestic debt securities were RM223bil, and non-residents’ deposits were RM88bil, thus totalling RM311bil of the total RM745bil external debt. The remainder were offshore borrowings (RM367bil) and trade credits and other items (RM67bil).

On one hand, ringgit-denominated borrowings by Malaysia do not carry the same risks of exchange rate volatility that dollar-deno­minated loans have.

Thank goodness for that, because the recent depreciation of the ringgit means that more ringgit would have to be forked out to service and repay those external loans that Malaysia has taken in US dollars and other foreign currencies.

On the other hand, the increase in foreigners’ holdings of Malaysian Government securities and corporate bonds, although denominated in ringgit, also increases the country’s exposure in terms of having to service the loans (including paying interest to foreigners, thus causing an outflow on the current account of the balance of payments) and of outflows of funds if and when the foreigners decide to withdraw the credit they provided.

Much of the public securities or private bonds that the foreigners took up can be sold back in the market and taken out of the country, and it is not unusual that buyers do not hold the financial asset until the maturity date.

If there is a change in market sentiment, prompted by either international or domestic conditions, then there can be a net outflow of foreign funds held in debt securities.

It is true that the build up of foreign holdings of Malaysian securities and bonds is made possible by the increased openness and attractiveness of the Malaysian financial market, as explained by the Finance Ministry.

On top of the exposure to foreign ownership of loans, there is also significant foreign ownership of equity in the Stock Exchange (which is not counted in the figures on external debt).

The same openness that brought the capital inflows could also lead to capital outflows when conditions change.

The easy-money policies of the United States, that included near zero interest and quantitative easing that pumped over a trillion dollars into the banking system, contributed to huge funds seeking higher yield in developing countries like Malaysia.

Since the end of quantitative easing in the US and with the increasing prospect that interest rates will rise, the same funds have begun to return to the US.

Malaysia is no exception to the countries facing a reversal of capital flow. It is not clear if this will be offset by the new quantitative easing exercise which just started in Europe.

For the whole of 2014, there was a net outflow of RM37.9bil of portfolio investment, and RM20bil of that in the fourth quarter, according to Bank Negara data.

This portfolio investment includes foreign holdings of debt and stock market equity.

The outflow of portfolio funds, together with outflows of direct and other investments, caused the financial account of the balance of payments to have a deficit of RM76.5bil in 2014, thus contributing to the decline in the overall balance of payments by RM36bil, according to Bank Negara data in its Quarterly Bulletin Fourth Quarter 2014.

The international reserves correspondingly declined from RM441.9bil in end-December 2013 to RM405.5bil in end-December 2014 (according to Bank Negara Quarterly Bulletin) and to RM386bil on Feb 27, 2015 (Bank Negara media statement March 6).

The declines are significant but the current situation is manageable as high reserves were built up through the years, so that the country will not be caught again by the crisis conditions of 1997-99.

The redefinition of debt figures and the recent data on movements in portfolio investment and reserves show that a comprehensive overview of the debt situation enables a better picture of the country’s exposure to different types of debt-rela­ted and portfolio investment flows.

Another conclusion is that borrowing through ringgit-denomina­ted debt removes the risks associa­ted with foreign-exchange changes.

But it still results in dependence on the foreign appetite or prefe­rences in investment venue and consequently to exposure to significant outflows when these preferences alter.

As global conditions, especially in the US and Europe change, it will be a challenge to manage the country’s finances.

- Global Trends by Martin Khor

> Martin Khor is executive director of the South Centre, a research centre of 51 developing countries, based in Geneva. You can e-mail him at director@southcentre.org. The views expressed here are entirely his own.

SE Asia draws more FDI investments

Region draws more investments than China for 2nd year running.

JAKARTA: South-East Asia's major economies drew more foreign direct investment combined than China for the second straight year in 2014, as growth in their giant neighbour cooled. But by country, inflows into the region were uneven, swayed by political change and the varying costs of doing business.

Overall FDI into Singapore, Indonesia, Malaysia, the Philippines, Thailand and Vietnam rose to a record US$128bil in 2014, estimates compiled by Thomson Reuters show.

That surpassed the US$119.56bil that flowed into China.

FDI into the Philippines grew the fastest, at 66%, while in Thailand, where the military seized power last year, inflows fell. FDI into Indonesia, the region’s biggest economy, rose around 10% even though it was an election year.

As China’s troubled manufacturing sector loses momentum, Chinese businesses will be venturing abroad to cut operating costs and to search for new markets, economists say.

Manufacturing powerhouses in South-East Asia should pay heed.

“Rising wages in China are leading low-end manufacturers to look for other low-cost locations for their factories, with countries like Vietnam and the Philippines looking like attractive alternatives,” said Dan Martin, Asia economist at Capital Economics.

“Asean is also a large market in its own right, and one with good long-term growth prospects. Given the general slowdown in other emerging market regions in recent years, it is starting to stand out.”

The Philippines, the second-fastest growing major economy in Asia, attracts investors with its strong economic fundamentals.

But one concern is the continuity of economic policies following the 2016 general elections.

That means some investment decisions might be postponed. Slumping commodity prices could pinch on FDI inflows into resource-rich Indonesia and, to a lesser extent, Malaysia.

Indonesian President Joko Widodo, who took office in October, is seeking more foreign investment in manufacturing to counter the volatile resources sector. But Indonesia has many improvements to make, particularly in its business infrastructure, to successfully challenge the region’s manufacturing leader.

— Reuters

German Chancellor: Japan needs honesty to improve relations with victims of World War II

 

Angela Merkel: I think history and experience tell us also that peaceful means of reconciliation have to be found

TOKYO: German Chancellor Angela Merkel waded into the fraught area of wartime forgiveness during a visit to Japan, saying that “facing history squarely” and “generous gestures” are necessary to mend ties.

Merkel was speaking in Tokyo on March 9 2015 ahead of the 70th anniversary of Japan’s defeat in World War II, in which Prime Minister Shinzo Abe’s conservative views on Tokyo’s war crimes are under scrutiny, and as China and South Korea continue to call for more contrition.

“Germany was lucky to be accepted into the community of nations after the horrible experience the world had to meet with Germany during the period of National Socialism (Nazism) and the Holocaust,” she said.

“This was possible first because Germany did face its past squarely, but also because the Allied Powers who controlled Germany after WWII would attach great importance to Germany coming to grips with its past.

“One of the great achievements of the time certainly was reconciliation between Germany and France ... the French have given just as valuable a contribution as the Germans have.”

Relations between Japan and its wartime victims China and South Korea are at a low point, with Beijing and Seoul both calling for Tokyo to do more to atone for its past.

Nationalists in Japan say Tokyo has apologised enough and that the constant references to WWII are covering flak for governments in China and South Korea seeking to direct popular anger elsewhere.

There were “great minds and great personalities who said we ought to adopt a policy of rapprochement ... and without these generous gestures by our neighbours this would not have been possible,” Merkel told her audience.

The public lecture came on the first day of a two-day trip to Tokyo, her first in seven years.

Abe visited Germany last year.

China’s foreign minister Wang Yi on Sunday said Abe would be welcome at Beijing’s commemorations of the end of WWII if he was “sincere” about history.

Beijing has not given a specific date for the parade but it regards Sept 3, the day after Japan signed its formal surrender to Allied forces on board the USS Missouri in Tokyo Bay, as victory day.

“It’s difficult for me as the German chancellor to give you advice on how to deal with part of your neighbourhood. But I think history and experience tell us also that peaceful means of reconciliation have to be found,” Merkel said in response to questions.

Merkel’s visit to Japan is part of her swing through G7 member nations before Germany hosts the group’s next summit in June. She has already visited the other five nations.

The visit, her third to Japan in almost 10 years in office, is seen as a balancing act between Germany’s ties with Beijing and Tokyo. She has been to China seven times during the same period.

Thanking Japan for joining Western powers in imposing sanctions on Russia over its annexation of Ukraine, Merkel said: “Japan and Germany share common interests whenever the strengthening of the international rule of law is to be brought about.” — AFP

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You are 'Stupid' is not defamatory

PUTRAJAYA: Calling a person “stupid and recalcitrant” does not amount to defamation, the Court of Appeal has ruled.

Court of Appeal judge Justice Mohd Hishamudin Mohd Yunus, who chaired a three-man panel, held this in a civil appeal brought forward by Jelutong MP Jeff Ooi (pic) against a politician over the dismissal of Ooi’s defamation suit.

Justice Mohd Hishamudin ruled Thursday that “although it was not nice to use the words”, it did not amount to defamation.

On April 22 last year, Ooi’s defamation suit against Gerakan deputy secretary-general Dr Thor Teong Gee for calling the former “stupid and recalcitrant” at a press conference was dismissed by the Penang High Court.

Justice Mohd Hishamudin, who upheld the High Court’s ruling in an unanimous decision, also ordered Ooi to pay RM10,000 to the defendant in costs.

In the coram were Court of Appeal judges Justice David Wong Dak Wah and Justice Vernon Ong Lam Kiat.

At the outset of court proceedings when queried by Justice Mohd Hishamudin, Ooi’s lawyer R. Ramesh Sivakumar argued that those words were defamatory because they were a personal attack on the credibility of his client.

Ramesh Sivakumar argued that Dr Thor had acted mala fide by using those words.

“He could have used better words. By calling him stupid, he was portrayed as not fit to be an MP,” he added.

However, Dr Thor’s counsel Baljit Singh and V. Amareson were not required to submit in the appeal.

In an immediate response, Dr Thor said he was very grateful for the appellate court’s decision as he had never made a personal attack against Ooi.

“An NGO invited me to give a professional views on medical issues on radiation,” said Dr Thor, who is a Penang-based medical doctor, when contacted.

In her ruling earlier, High Court Judicial Commissioner Nurmala Salim said Ooi had failed to state the alleged defamatory words in the original language, which was in Mandarin, in his statement of claim.

She also held that the words used by the defendant Dr Thor in the press conference were in reference to a radiation issue, and not a personal attack against Ooi.

“I am inclined to concur with the defendant’s (Dr Thor) counsel that the words uttered are commonly used by Malaysians of all races during an argument or when one is angry,” she said in her decision.

She also said the court did not see how the words had sullied Ooi’s reputation and office, as he had earned a bigger majority of votes in the 2013 general election compared with the general election in 2008.

“The plaintiff (Ooi) himself had refused to state how the words had tarnished his office and reputation,” she said, before dismissing the suit and ordering Ooi to pay RM20,000 in costs to Dr Thor.

Ooi sued Dr Thor for defamation for allegedly uttering the words “stupid and recalcitrant” against him in a press conference on May 21, 2010.

He sought aggravated and exemplary damages, a retraction and an apology by Dr Thor, as well as costs and other relief deemed fit by the court.

By M. Mageswari The Star/Asia News Network

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