Many people asked me about this now so I give my opinion on this: ~ Abstract from Deutsche Bank Research. 1. Malaysia External debts matric worrying. Foreign ownership highest now on bonds and central bank bills. LSS: This is true. Foreign holdings of Malaysia govt bonds are about 35% (about RM300b) but has dropped quite a lot recently as foreigners sell Malaysia bonds and transfer the money out - most probably to the USA where the economy figures are better now and the USA has signalled it is ending quantitative easing and start increasing interest rates. It is important to note that these bonds are in Ringgit Malaysia - hence foreigners who sell our bonds 3rd parties will get ringgit. Most of these are long-term bonds and cannot be redeemed from govt as the term is not up yet. Hence, they can only sell in Ringgit and only if there are buyers buying it (mostly EPF, our other funds, corporates and other foreign foreign buyers still intent to stay in Malaysia). There does not seem to be a big sign of panic selling in Malaysia bonds as bond yields have not jumped tremendously (and in fact over this week, the yields have fallen). This is also why you dont see interest rates jumping insanely like it did in 1997 to 1998 as during those years, investors panicked as we did not have enough forex reserves (Thank you Anwar!!) and forecast was that were headed for a deep recession then. This is simply not the case today. Note: Since our Bursa is oil and gas heavy and this sector is not doing too well, there are also foreigners selling our stocks (and hence Bursa went down) and the money they make here will also be converted out of Ringgit and hence also putting pressure on our Ringgit. HOWEVER, if our Ringgit vs USD is too low, these people bringing out will also experience a loss and hence these people wont simply throw the shares and desperately bring it out of Malaysia. It is also important to note that over the past 6 years, our BURSA has more than doubled so these people also have made money and it may be time for time to exit Malaysia and look for investments elsewhere. VERY VERY IMPORTANT! Our country is not crashing and suddenly becoming Zimbabwe. We are still foretasted to register 4.7% growth in 2015(world bank) or 5%-5.5% (Malaysia gohmen predictions) - this is very good by any measure. NOT A SINGLE analyst has forecast that Malaysia will be in recession or have growth below 3% - NOT ONE! Therefore, there is no panic selling and dumping of our bonds. If there is, bond yields and eventually our bank interest rates would have jumped by now - so far it hasnt. And the fact that we are still registering growth means that even if bond yields go up and our exchange rate weakens more against the USD, foreigners will come back into our market to buy our bonds hoping for higher interest rates and potential forex gains coz they know our economy not dying but growing. 2. BNM defended RM at 3.5 against USD in Dec but gave up on early Jan 2015, Used up USD 5bn in 2 weeks in Dec. Sharp drawn down which is already been declining reserves on recent months. LSS: This is not exactly true. BNM typically does NOT have a target rate set for USD or any rate and prefers the market to find its level. BNM however intervenes when the fluctuations become too great and may cause wild swings. this could be what happened in early December and hence BNM probably moved in to stabilise the big swings and incurred a loss. Business people dont like too big a change in exchange rate in a short time and hence this is when BNM stepped in. 3. Thus reserves now only able cover short term external debt liabilities making Malaysia the worst debt cover profile. LSS Our short-term cover ratio is 1.2 at the moment - meaning that if all the foreigners took out ALL our money all at once, we can still pay for it. and still have money left. (we have RM400b forex reserves). This is immaterial as our economy is still growing and the foreigners are not climbing over themselves to dump all their holdings of Malaysian assets and run away within the year. 4. Malaysia entities offshore borrowing surge lately. LSS: This is logical lah.. Coz the corporates will look at the weak ringgit and borrow in USD and hoping that the Ringgit will strengthen back and they will make a gain on their loans or at least reduce their borrowing cost. 5. Fiscal policy likely to miss govt target of 3% deficit. Though subsidies cut, but revenue drop more than 20%, deficit could rise to 3.8%. LSS I hope govt misses this for the reasons I listed here: tinyurl/nfykafz Budget deficit of 3.8% is not a big deal and we in fact had more than this from 2008 to 2013. 6. Household debts is 87% of GDP as at 2013, highest in the region. Slowdown on household spending will decelerate Malaysia as private consumption is the source of growth for Malaysia. LSS: In late 2013, Malaysia already instituted cooling measures on our domestic private consumption by having stricter borrowing limits and actually raised interest rates in 2014. Govt already switched over to export-led growth in 2014 and wthe household debt ratio was back under control in 2014. 7. Trade balance only support current account. Importing outpacing export. Malaysia need at least 1.7bn/m to avoid current account deficit, but last 3 months fall short of this threshold. LSS: The write says we need a trade surplus of RM1.7b per month to avoid current account deficit in order to avoid a twin-deficit scenario. However due to weak exchange rates, our manufacturing exports grew almost 5% in the month of Novermber 2014 (latest figure) and we had a trade surplus of more than RM11billion in that month alone - the highest in 3 years. Although there will be pressure on increased imports during Jan-Mar period as consumers wanna buy lots of imported stuff during this period to avoid GST, the weaker ringgit will mean manufacturing-related exports will continue to do well. Coupled with active govt efforts of postponing big-ticket imports for infrastructure further forward into the year will mean we can and should avoid a current account deficit for Jan to Mar quarter. We would however, definitely have a positive trade surplus for the entire year. So, as you can see. Not doomsday scenario at all. Just some uncertainties that govt needs to manage well and explain what is happening so that zombies dont jump off KLCC and hit someone on the way down.
Posted on: Sat, 17 Jan 2015 13:15:19 +0000
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