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:

MalaysianRinggit1

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

foreign-institutional-holdings-of-local-bonds

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

Malaysian-Foreign-Direct-Investment

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

malaysia-stock-market

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.

malaysia-gdp

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-government-debt-to-gdp

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

malaysia-government-budget

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:

malaysia-bank-lending-rate

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

malaysia-loans-to-private-sector

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

malaysia-money-supply-m3

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:

malaysia-consumer-spending

Malaysian car registrations are up by 50 percent since 2008:

malaysia-car-registrations

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:

malaysiapropertybubble

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.

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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)

INDONESIA-APEC-SUMMIT

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:

China-GDP_0

HKDebtBubble1

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

China-Cement2

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.

Bank-Negara-Zeti-Akhtar-Aziz

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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