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Malaysia’s foreign reserves fall by US$34 billion
Posted By anilnetto On 24 February 2009 @ 12.20pm In Economy 15 Comments
Malaysia’s foreign reserves plunge (US$ billion) Source: Bank Negara
Over the last eight months, the country’s foreign reserves have dropped by US$34 billion. They have dipped from a high of US$125.8 billion on 30 June 2008 to US$91.6 billion as at 13 February 2009.
Total gross international reserves:
2008
31 Mar US$120.3 billion
30 June US$125.8 billion
30 Sept US$109.7 billion
31 Dec US$91.3 billion
2009
13 Feb US$91.6 billion
Let’s zero in on the third quarter of 2008. During this period alone, Malaysia’s foreign reserves fell by RM31.5 billion.
On the flip side, the balance of payments posted a deficit during the third quarter of RM31.5 billion. (We had a surplus of RM26.2 billion in the second quarter.) In other words, we had to dip into our piggy bank because our payments were more than our receipts during the third quarter.
The breakdown of this balance of payments deficit is as follows:
Current account (trade in goods and services): RM38.7 billion surplus.
Capital and financial account: RM61.5 billion deficit (an increase of 400 per cent from the second quarter!)
Errors and omissions: RM8.8 billion (negative)
Net: RM31.6 billion deficit
So it is clearly that funds have been flowing out of the country from the third quarter onwards.
Now, let’s look more closely at the capital and financial account deficit of RM61.5 billion.
Capital Account:
RM million
Q3/08
-119
-37
Credit
RM million
Q3/08
6
1
Debit
RM million
Q3/08
126
38
Financial Account
RM million
Q3/08
-61,360
-12,270
Direct Investment Abroad
RM million
Q3/08
-19,851
-14,483
Direct Investment in Malaysia
RM million
Q3/08
881
17,392
Portfolio & Financial Derivatives – Net
RM million
Q3/08
-56,179
-24,020
Other Investment – Net
RM million
Q3/08
13,790
8,841
Source: Bank Negara
We can now see that this RM61.5 billion deficit is largely due to the financial account deficit. To be more specific, direct investment abroad has risen. On the other hand, direct investment in Malaysia has sunk 95 per cent from RM17.4 billion in the second quarter of 2008 to just RM0.9 billion in the third quarter.
Meanwhile, portfolio and financial derivative funds have been fleeing the country. The third quarter of 2008 saw RM56 billion leaving the country, 134 per cent more than the second quarter of 2008.
The figures don’t lie.
That said, the foreign reserves of US$91.6 billion (as at 13 February 2009) are sufficient to cover 7.6 months retained imports and 4 times the short-term external debt of the country.

Beyond FDI towards a sustainable Malaysian economy
A couple of weeks ago, I wrote an article on the Malaysian economy, which also touched on the net investment outflows from Malaysia in recent times: Capital outflows cloud economic outlook (Asia Times).
That prompted a thoughtful response from an analyst who makes a valid point – that we must discard our obsession with securing foreign direct investments (FDI), which has blinded us to alternative paths towards a more sustainable domestic economy. Instead, he says, we need to look at how we can promote domestic investment while assessing qualitatively how beneficial each investment is to the people and to the local economy:
Generally nice article. However, I thought the section on investment flows was somewhat misleading, although the overall question — why are Malaysians investing abroad — is valid and important.
Comparing IIP, i.e., net flows, in the way presented, is not, in my view, helpful. Further, it feeds into all that obsession about incoming FDI. At a glance, and to a non-careful reader, it suggests an outflow of foreign capital, which is not the case. For instances of such outflows of foreign capital, look at Ireland, which had a -20b of inward FDI, i.e., actual divestment.
Post-Asian Financial Crisis, and leaving out Singapore as a special case, Malaysia has remained the second most attractive site, after Thailand, for incoming FDI, with Vietnam catching up with Indonesia and, in 2008, overtaking it, as the third. That’s true in terms of value, while as number of greenfield projects, we had the second largest number to Vietnam, until 2008 when Thailand overtook us.
Of some concern, perhaps, is that from having the largest FDI inward stock pre-Asian Financial Crisis, Thailand has now leapt ahead, with Indonesia fast catching up. However, there needs to be some investigation of the composition of that stock — recall that in the aftermath of the AFC, there were some fire-sales of assets in both Thailand and Indonesia, so that FDI may well comprise equity rather than greenfield investments. If so, then it comes down to how we weigh this up.
But the real concern, as I see it, are in other areas:
1. As a percentage of fixed gross capital formation, leaving out Singapore (as a special case) and poverty-stricken Cambodia, we have the highest FDI: gross fixed capital formation in the region at around 18-19 per cent.
Worse is that outward FDI amounts to 32 per cent of gross fixed capital formation, i.e., even more than inward FDI.
2. Among developing countries, Malaysia is a stand-out in that outbound FDI exceeds inbound FDI, and by an increasing amount. What this suggests is that we do not lack capital — hence the continued emphasis on FDI by both the BN and the PR is, I believe, misplaced. A comparison here might be Korea and Taiwan. In both instances, FDI outflow > FDI inflow. Those are developed economies, now searching for opportunities abroad, while keeping their backyard pretty much to themselves. The other comparison would be the USA where, despite its sucking in so much of the world’s capital, FDI outflow > FDI inflow, excepting the madness of 2007.
A good proportion of this out-bound FDI in 2008 was due to mergers and acquisitions, i.e., Malaysians buying up assets and firms, probably the ill-timed Maybank purchases…
Putting it together suggests that Malaysian capital is moving out.
How do we assess this? There are a number of ways:
1. The most negative is to see it as a capital strike by Malaysian capitalists. This can be for any number of reasons: they don’t like government policy because it favours workers too much (and that does not have to be because it actually does, but the capitalists want more); or due to NEP considerations, but that wasn’t an issue previously; or simply that costs have gone up here, including labour costs, relative to other places.
2. The most positive is to see it as Malaysia becoming a significant global player, not just a host country. That’s how the government and its spokespeople would like to spin it.
3. A more neutral approach is to assess the investments made and in what way they benefit the country, not just the capitalists making the investments. For instance, there have been investments in oil palm plantations in Indonesia and elsewhere.
It’s hard to see how that benefits us as a country, other than by way of taxable remittances of profits. Contrariwise, Petronas investments arguably benefit the country in so far as they are a state-owned corporation and in so far as they help secure energy supplies for us.
Whatever, we come back to policy designs that will prioritise domestic investment by domestic capital, and not get so worked up about satisfying foreign investment demands.