Posted January 24, 2015 6:33 pm by Comments

Reuters has a lengthy article about how tumbling oil prices are putting pressure on Malaysia’s commodity-driven economy and is putting an unwelcome spotlight on the huge debts that the country runs. In fact, borrowings amount to 53% of economic output, almost equalling that of Asian giants India and China, and the economy is running on debt on all fronts: government, households and the capital account.

Foreign investors also have $45 billion parked in the country’s bonds and have lent a total of $208 billion to the high-yielding country. But now, the credit markets rank Malaysia as the riskiest in Southeast Asia and the ringgit has plunged to six-year lows.

The risk? The ringgit could come under increasing pressure should oil prices remain low for long enough to put the current account into deficit with foreign investors, who own 44% of the bond market, running for the exits. The next problem would be the $102 billion of short-term borrowings Malaysia has to pay back to the world which are barely covered by the $116 billion of foreign exchange reserves held at the end of last year.

One other problem: Malaysia defended its currency in 2013 but that defense has backfired as the stability during that period led the country to take on more debt withinvestors and borrowers perceiving it as a reliable, oil-rich economy.
To read the whole article, Red lights blinking on Malaysia’s economic dashboard along with Ringgit continues losses against dollar, go to the websites of Reuters and the Malay Mail Online, respectively. In addition, check out our analysis of Malaysia: Malaysian Elections: Will The Malaysia ETF Sink Or Rally? and The Malay Dilemma: Is Malaysia A Safe Emerging Market Investment?

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