In the past few weeks, I have been meeting with several senior officers from different foreign embassies. And among other topics, we discussed the economic prospects for 2015. Then, the numbers have just come in that USD900 million (RM3.1 billion) worth of Malaysian bonds were dumped by foreigners in one week in late October. About the same time, my friend who is an economic data expert was in town and we contemplated what it means to have USD50 per barrel oil as the new norm. This was just before the start of the big slide in global oil prices.
Truth is, during the last 4 years of American QE, short term foreign funds have taken up 30% to 40% of our govt implicit and explicit bonds. There were also some interest at the equity front but foreign funds were primarily hunting Malaysian bonds which carried 3.5% to 5% yields. Whilst it does not look 100% like 1997 all over again (1997 was primarily equities with wild valuations, what we have now are bonds), the fact that we have a very large volume of foreign money in our system, ready to run, is worrying. Can EPF soak up all when the big foreign dumping starts?
Fundamentally, these money are flowing out because Malaysian fiscal and economic numbers are not good. Despite the plan for fiscal austerity (3% deficit) and introducing GST in 2015, financial embarrassments (1MDB) and political u-turns (racial tensions up, Sedition Act, Sabah RCI) continue to spook investors. Admissions by government to an unquantifiable amount of letter of supports (which are strictly guarantees) in the recent November Parliament sitting does not help paint a transparent fiscal picture of Malaysia too. Whitewashing government loans using debt to equity swaps in the very last day of Parliament also does not help. The government has not shown any signs of real economic reforms, instead it is using accounting and financial tools to obscure the true fiscal picture.
The October bond sell-off outflow probably started a fall in the value of our currency and then the fall in oil prices (both oil and gas and palm oil) pushed the currency further down. So whilst it is not exactly like 1997, there are similarities. It appears, that we may be heading towards a perfect storm in terms of economic vulnerability in 2015.
I turn 46 this month. I am old enough to vividly remember the 1997 financial crash. I was then, a young corporate lawyer and saw how 1997 destroyed the lives of so many. It also broke the spirit of Malaysia Boleh, which now means something completely cynical and different. Therefore, I urge the authorities to start focusing on economic solutions. For start, instead of disappearing with a tak apa attitude, PM Najib better take steps to form an economic crisis management team very soon.