Malaysia Faces Economic Contagion From India And Indonesia

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In 1997, the Thailand government failed to fully defend its currency from speculative attacks. Quickly, the crisis spread and soon Indonesia was suffering from similar attacks. Shortly after that, the crisis spread through Malaysia and the rest of S.E. Asia. Now, the risk of economic contagion is threatening the region with both India and Indonesia struggling to confront developing economic crises. Already, some analysts are speculating that Malaysia could be next.

Malaysia Faces Economic Contagion From India And Indonesia

Economy of Malaysia dependent on exports and commodities

Malaysia’s economy is highly dependent on manufacturing exports and commodities, including oil and palm oil. With global demand drying up, Malaysia’s manufacturing sector is sure to take a hit. Dropping oil prices could also kill revenue. Given that the national oil company, Petronas, supplies some 50 percent of revenues for the government, a blow to oil prices is a direct blow to the country’s finances. Meanwhile, demand for palm oil is also cooling off.

Compared to other emerging Asian states, Malaysia suffers from considerably high debt levels. Malaysia’s debt now stands at about 54 percent of the GDP. This is especially worrisome given how much revenue the countries collects from oil and palm oil. No other S.E. Asian nation has debts in excess of 50 percent. Indonesia’s debt, for example, weighs in at less than 25 percent. Still, a debt level of 54% does not represent a short-term challenge, though continuing government deficits could become a long-term risk.

Also see: Thailand Dragged Into Recession By China’s Economic Woes

Malaysia’s account surplus

Still, Malaysia has been running account surpluses in recent years, with more money generally coming in than flowing out. This has allowed the country to build up cash reserves of nearly a hundred of 150 billion dollars, which is on par with the United States. Malaysia will be able to defend its currency if necessary. A currency crisis is thus unlikely.

Indeed, Malaysia has consistently run account surpluses since the 1997 crisis. Now, however, the nation’s surpluses have been rapidly shrinking and if they are not reversed, Malaysia could soon be running a deficit. While this likely will not cause a monetary problem, owing to the nation’s huge reserves, it could weaken investor and business confidence levels.

While a currency crisis is unlikely, an economic crisis, on the other hand, could be brewing. Indeed, Malaysia’s central bank has already slashed growth forecasts from 5-to-6 percent to 4.5-to-5 percent. While this growth is still solid for a middle income country, if global economic conditions worsen, the rate could be slashed once again.

Drop in exports

Exports have been dropping YOY. May saw exports drop by 5.8 percent, while June saw a decline of 2.3%. Most of the drop in exports has been from decreased demand from other Asian countries, such as China and Japan. Still, the decline in Western markets could ultimately be the cause. As demand from the West drops, demand for finished goods from Japan and China will decrease. The effects will then ripple down the supply chain to countries like Malaysia.

Internally, Malaysia has been stabilizing since the contested outcome of recent national elections in May. The ruling power maintained power despite losing the popular vote, though lost the most seats in national history. Pakatan Rakyat, led by Anwar Ibrahim, has now emerged as a serious contender for national power and in the days following the election the party held rallies that threatened to destabilize the national. Tensions have cooled, but renewed economic crisis could ratchet them up again.

While Malaysia looks to be stable in the short-term, there is no telling what direction events could take if the global economy continues to stall out. Many investors around S.E. Asia are already weary, owing to the experiences of the 1997 financial crisis. All the while, Indonesia and India continue to face mounting problems as their currencies decline and economies stall out. This could have rippling effects on other S.E. Asian nations. Still, Malaysia should remain strong for the near term.

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