The Malaysian Insight featured an article entitled The Malaysian economic indicator that is raising red flags which centered on Malaysia’s weakening Current Account Balance. This issue had been raised in the past by The Rembau Times in article over here which showcased data up to the 2nd Quarter of 2016.
With the latest release by Bank Negara, the series is updated up to the first quarter of 2017 as shown above, which allows us to review whether the situation has improved over the past 9 months or not.
First, it is important to understand whether Malaysians should be concerned with a weakening Current Account Balance. The Current Account Balance consists of 3 components
- Goods and Services balance: Refers to the difference between total exports and total imports of Goods and Services
- Primary Income Balance: Refers to the difference between primary income receivable by Malaysia residents from abroad and primary income payable to non-residents in Malaysia. Here is where the effects of Malaysia’s high dependence on foreign labour shows up as we had debits of RM 81 billion in 2016 in the primary income mainly due to foreign labour. Worryingly for Malaysia is that this number increased by 31% in 1Q17 to RM 23 billion compared to RM 17.5 billion in 1Q16.
- Secondary Income Balance: Differences between current transfers received from received by Malaysia residents from abroad and current transfers received by non-residents in Malaysia. This number is consistently negative RM 4.5 billion a quarter and is not really material.
In the article by Malaysia Insight, it cites 4 main effects of a weak current account balance, namely :-
* It makes it harder to create new jobs and sources of income for citizens thus, curbing their spending power.
* It saps investor confidence, which can then weaken the ringgit.
* A weak ringgit would make imports, such as food and goods, more expensive and drive up supermarket prices.
* The worst part is that the above factors can compound and feed off each other, thus, leading to slower overall growth.
-“The Malaysian economic indicator that is raising red flags” (Malaysia Insight)
Should we worry?
These 4 effects cited by Malaysia Insight are absolutely spot on but this is over a long term period, i.e. over 2 to 3 years. So the colour should be ‘Amber’, instead of ‘Red’.
However, even if the economy moves into a current account deficit, a momentary current account deficit is unlikely to trigger an extreme reaction such as a ratings downgrade. We are not in the state as we were in 1998 when we witnessed a sudden currency depreciation followed by an economic crisis. However, any sudden loss of power by the Barisan Nasional Government in the General Election to the hands of PAS could trigger such a crisis scenario and should not be discounted given that recent surveys have put PAS as the first choice party among rural Malay voters.
So long as Rating agencies continue to affirm Malaysia’s sovereign rating at A-, then there will be no sudden crisis as was witnessed in 1998. The effects of a weak current account balance cited by The Malaysia Insight will eventually filter into the economy but that will be over several years, much longer than the attention span of any politician in the country. Whilst rating agencies do pay attention to the Current Account Balance, there are enough positive developments in terms of economic growth, low foreign denominated debt and a stable banking system for them to generally maintain a status quo. Until then, the effect of the weak current account balance, whilst as negative as it is, will be felt in drips and drabs over the next several years.