Malaysia’s Bubble Economy

The following article is written by Jesse Colombo and published in Forbes on 15th October 2013, titled “Malaise Is Ahead For Malaysia’s Bubble Economy”:

The emerging markets bubble began in 2009 after China pursued an aggressive credit-driven infrastructure-based growth strategy to bolster their economy during the global financial crisis. China’s economy quickly rebounded as construction activity flourished, which drove a global raw materials boom that greatly benefited commodities exporting countries such as Australia and emerging markets. Emerging markets’ improving fortunes began to attract the attention of global investors who were seeking to diversify away from Western nations that were at the epicenter of the financial crisis.

Rock-bottom interest rates in the U.S., Europe, and Japan, combined with the Federal Reserve’s multi-trillion dollar quantitative easing programs encouraged a $4 trillion torrent of speculative “hot money” to flow into emerging market investments over the past four years. A global carry trade arose in which investors borrowed at low interest rates from the U.S. and Japan, invested the funds in high-yielding emerging market assets, and pocketed the interest rate differential or “spread.” Soaring demand for EM assets led to a bond bubble and ultra-low borrowing costs, which resulted in government-driven infrastructure booms, alarmingly fast credit growth, and property bubbles in numerous developing nations.

Surging capital inflows into Malaysia after the Crash of 2008 caused the ringgit currency to rise 25 percent against the U.S. dollar in just two years:


Foreign holdings of ringgit-denominated bonds hit an all time high:


Foreign direct investment (net inflows, current dollars) immediately recovered from its crisis-induced plunge to dramatically surge to new highs:


The Kuala Lumpur Composite stock index rose 120 percent, aided by growing interest from foreign investors:


Malaysia Is A Classic Credit Bubble Story

Malaysia’s $303 billion economy has been growing at an average 6 percent rate in recent years due in large part to a growing government and household credit bubble.


Since 2010, Malaysia’s public debt-to-GDP ratio has been hovering at all time highs of over 50 percent thanks to large fiscal deficits that were incurred when an aggressive stimulus package was launched to bolster the country’s economy during the Global Financial Crisis. After Sri Lanka, Malaysia now has the second highest public debt-to-GDP ratio among 13 emerging Asian countries according to a Bloomberg study. Malaysia’s high public debt burden led to a sovereign credit rating outlook downgrade by Fitch in July.


Malaysia’s government has been running a budget deficit since 1999:


Like their government, Malaysian households are also binging on debt, which has caused the county’s ratio of household debt to GDP to hit a record 83 percent – Southeast Asia’s highest household debt load – which is up from 70 percent in 2009, and up greatly from the 39 percent ratio at the start of the Asian Financial Crisis in 1997. Malaysian household debt has grown at around 12 percent annually each year since 2008.

It’s no surprise to see an inflating household debt bubble when Malaysia’s bank lending rate is at record lows:


Ultra-low interest rates have caused Malaysia’s private sector loans to increase by over 80 percent since 2008:


Malaysia’s M3 money supply, a broad measure of total money and credit in the economy, shows a similar worrisome trend:


Malaysia’s high level of household debt led the country’s central bank, Bank Negara, to recently impose lending rules that cap maximum terms of personal loans to 10 years and mortgages to 35 years – a decrease from the common 45 year mortgages.

Datuk Paul Selva Raj, CEO of the Federation of Malaysian Consumers Associations (FOMCA), said 47 percent of young Malaysians are currently in “serious debt” (debt payments amount to 30 percent or more of their gross income), something that could catch up with them very quickly.

“Car purchases and credit card debts are among the main reasons for bankruptcy in Malaysia,” said Paul. “It’s the culture we live in. There’s a lot of emphasis on status and being ‘cool’ – but being cool costs money.”

Malaysia’s household credit bubble is helping to fuel a consumer spending boom:


Malaysian car registrations are up by 50 percent since 2008:


Malaysian corporate leverage, which includes corporate bonds and bank loans, is also rising at an alarming rate, reaching 95.8 percent of GDP in 2013 from 79.9 percent in 2007.

Malaysia Also Has A Property Bubble

Like most other countries that are part of the emerging markets bubble, Malaysia has a property bubble in addition to its credit bubble.

The charts below show the parabolic rise of overall Malaysian property prices:


Accounting for nearly half of all household debt, soaring mortgage loan growth is a primary reason why Malaysia’s household debt is increasing at such a rapid rate.

Plans to build the tallest building in Southeast Asia, the 118-story Warisan Merdeka Tower, are a major Skyscraper Index red flag.

How Malaysia’s Bubble Economy Will Pop

While Malaysia has fared better than Indonesia, India and Brazil during this summer’s emerging markets rout, the country still has an extremely dangerous economic bubble that will pop when the overall emerging markets bubble pops in earnest. Malaysia’s bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place. The resumption of the U.S. Federal Reserve’s QE taper plans may put pressure on Malaysia’s financial markets in the near future. Malaysia’s rapidly deteriorating current account surplus due to weaker exports is another worrisome development.


Jesse Colombo published a follow up article on 18th October 2013 in Forbes, titled “It’s Not A Bubble Until It’s Officially Denied, Malaysia Edition”:

Lim-Guan-EngThe report received a favorable response from Lim Guan Eng, the Chief Minister of the State of Penang, who said in a press statement, “Even renowned financial analyst Jesse Colombo wrote in the Forbes online magazine that Malaysia’s economic bubble will burst due to its high government and household debt.”

Lim went on to say, “Interestingly, Colombo said that plans to build the tallest building in Southeast Asia, the 118-story and RM5 billion Warisan Merdeka Tower, is a major Skyscraper Index red flag.” The Skyscraper Index red flag refers to a Dresdner Kleinwort report in 2009 which showed a correlation between the construction of the world’s tallest buildings and the impending end of business cycles.

(The following “I”, “me” and “my” refer to Jesse Colombo)


The report also struck enough of a raw nerve that Malaysia’s International Trade and Industry Minister Datuk Seri Mustapa Mohamed refuted my assertion that the popping of China’s precarious bubble economy will also pop Malaysia’s bubble in a press conference in Kuala Lumpur, saying “The Chinese economy is not going to tumble. It’s going to stay strong. We’ve seen high growth in China for many years.”

“Malaysia is not going to be adversely affected. Anyway, we are focusing more on domestic resources growth and it’s becoming more relevant in this context,” he added.

There seems to be an unwritten rule that government officials across the world must deny the existence of economic bubbles that pose a great threat to their countries. When I was warning about the U.S. housing and credit bubble in 2005, Ben Bernanke infamously denied its existence. Officials are denying the UK’s and Australia’s housing bubbles, along with many other post-2009 bubbles that I am currently warning about.

I don’t see how public officials’ bubble denial does anything but harm to their countries’ citizens. Denying the existence of bubbles does not make them disappear, but only serves to hamper the early detection process that is so critical to the survival of terminal illnesses, whether physical or economic.

I also don’t see how denying the risks posed by China’s massive economic bubble does any good either. I will be writing an extensive report about China’s bubble after I finish covering bubbles in Southeast Asia, but for starters, they have a multi-trillion dollar debt bubble that has exploded in recent years as their government has encouraged the building of scores of empty “ghost cities” to generate economic growth.

Charts show a ballooning Chinese credit bubble:



The chart below shows how much of a role debt-fueled construction plays in China’s current bubble economy:


It is very difficult to completely deny the existence of a bubble in China, and even worse to say that Southeast Asian economies won’t be affected by its popping. I genuinely want to see emerging market nations thrive, which is why I am working to raise awareness of their bubble problems, as I did with the U.S.’ bubble. I want the rest of the world to avoid making the same bubble mistakes that the U.S. and peripheral Europe did that devastated our economies, but bubble denial on the part of policy makers only makes this unfavorable outcome more likely.


On 20th October, Bank Negara Malaysia Governor, Dr Zeti Akhtar Aziz responded as following:

There is no reason to believe that Malaysia has seen the formation of an asset bubble that is about to burst, as the country has addressed many of the issues and risks related to it. Three series of macro prudential measures had been introduced this year to avoid the very risk of the formation of such a bubble asset. Conditions between now and in 1997/1998 are different. We are now on a growth path.

She added that domestic demand was driving Malaysia’s economic growth and the country was not at the epicenter of the recent global financial crisis. Our financial intermediaries remain resilient and the supply of credit was never disrupted.  Financial inter-mediation was continuing and financial markets continued to function. There is confidence in the financial system. This is the result of the focus over the last decade on financial reforms that have strengthened the foundation of our financial system. We believe that credit growth has moderated to a sustainable pace that supports the growth of the economy. In this regard, we continue to monitor conditions.

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What Happened To Ringgit


The value of ringgit went down to the lowest point in the past 3 years during an aggressive sell-of across emerging-market assets. (Emerging markets are countries with social or business activity in the process of rapid growth and industrialization. Malaysia is part of the emerging markets.) By looking at the current trend, the value of ringgit will continue going lower – hence a higher USD exchange rate.

What happened to ringgit? The ringgit has declined 10% against the USD since end of May. This is due to worries over capital outflow from Malaysia’s government bond market to U.S. Treasury yields. U.S. Treasury yields are increasing and they appears to be more attractive for investors. (Bond yield is the percentage return that the investor will receive)


As you could notice from the chart, almost 50% of Malaysia government bonds are hold by foreigners. This is significantly higher compared to some of the other countries in Asia. If the foreigners decided to exit Malaysia bonds, it will cause the value of ringgit to go even lower.

Malaysia household debt is currently at 83% of gross domestic product. Earlier this month, Fitch Ratings (an international credit rating agency) downgraded its outlook on Malaysia from “stable” to “negative”. Both the high household debt and credit rating downgrade are factors that could trigger higher outflows from Malaysia bond market.


Indian rupee felt to a record low, the currency has weakened about 28% versus the dollar in the past two years. Thailand is in recession as domestic demand has been low and such trend is expected to continue Indonesian stocks have dropped about 20% since their peak and heading for bear market. A financial storm is directly above Asia. It is comparable to the 1997/98 Asian financial crisis.

During 1997/98 Asian financial crisis, Malaysia was hit extremely badly. Stock market dropped from 1,385 to 295 points while ringgit went down to as low as RM4.80 to US$1.00. At the peak of the crisis, interest rates went up to as high as 18%.


From a prudent employee to an active investor, everyone was hit during 1997/98 crisis. Property loan installment increased for both home owners and property investors, employees lost their jobs, businesses closed down, just to name a few. If you were old enough to sail through the 1997/98 financial, I’m sure you would agree that was nothing close to a pleasant experience and you wish you would never have to go through that again. Today 15 years later, are we going to see the same scenario again?

Malaysia's central bank governor Zeti Ak

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz assured the public that Malaysia (being the 3rd largest economy in South-East Asia) has the strength and capability to manage the current volatility. Zeti said Malaysia has robust foreign exchange reserves level, which stood at US$137.9 billion (RM456.5 billion) and low levels of foreign-currency debt at around 1% to 2% of GDP.

However if for whatever reason in the coming months, BNM could not “manage” the financial volatility efficiently, expect higher interest rate. Interest for debts will be substantially higher. Property (especially high rise luxurious sub-sale sector) would have little or no demand as many middle class might start to lose jobs. Stock market will crash and cash will be king.

Holding cash alone is useless if you have no idea what to do with the cash. The easiest way to profit from financial crisis is through stock investment because of high liquidity. You can buy and sell a stock fairly quickly. Legendary stock investor Warren Buffet said “be fearful when others are greedy and be greedy when others are fearful”. Value Investing is something Buffet personally practices during stocks selection, find out more about Value Investing here:


Weaken Ringgit & Negative Outlook

Malaysian Ringgit dropped to 3-year low against USD. Currently it takes RM3.26 to exchange for USD1.00. The value of Ringgit has been drastically falling since General Election took place in 5th May 2013. It this chart, it shows the value of Dollar is strengthen against Ringgit – therefore a weaker Ringgit.


The 1st reason is global investors are selling Ringgit as they expect U.S. would soon end the aggressive monetary stimulus (Quantitative Easing). They would then use their money invest into U.S. instead of Malaysia.

The 2nd reason is, Bank Negara Malaysia made an obvious absence from currency market. Our government might be allowing the currency to weaken to boost exports and improve trade balance.

This will be beneficial to exporting businesses and tourism industry because it now takes lesser Dollar to buy products made in Malaysia. Malaysia has also becomes a more attractive destination for tourists because it is now cheaper to spend money here. Imagine for every $100, a tourist can exchange for RM296 in May 2013. Now for every $100, the same tourist can exchange for RM325. Our Ringgit has fallen almost 9% against Dollar since early May. Malaysia is now a “cheap” country which is good for exporting business and tourism industry.

However for most working class, this is a bad news. Whatever amount of Ringgit we have in bank has just lost 9% of its value. In fact, even our salary has shrunk 9% due to a weaker currency. If we buy a product from U.S. that costs $100, it now takes us RM325 instead of RM296 just two months ago. For business owner, it simply means it takes more amount of Ringgit to purchase the same product (or service) in the global market.

The pressure on the Ringgit will remain until economic outlook improves and Bank Negara Malaysia will probably be forced defend the 3.25 per dollar support level by tapping into the country’s foreign reserves, according to a research note from DBS Bank.

On 30 Jul 2013, FitchResearch has revised Malaysia Outlook from Stable to Negative:



Malaysia’s public finances are its key rating weakness. It is approaching the government’s 55 percent limit. (Government debt rose to 53.3% of GDP at end-2012, up from 51.6% at end-2011 and 39.8% at end-2008.)


The revision of the Outlook to Negative reflects Fitch’s assessment that prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government’s weak showing in the May 2013 general elections.

As of July 2013, foreign ownership of Malaysian national debt was 49.5 percent. While foreigners only hold 30 percent of American debt. “There is indication that Malaysia is now at a point of vulnerability,” said Hak Bin Chua, Bank of America’s Asean economist.

The outlook for Ringgit and economy might not be extremely positive. Individual like you and me could do little to improve the situation. However, instead of blaming the government, we should learn to make the most out of available resource we as individual has.

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