Summary of the potential of ‘twin deficits risks’ for Malaysia

Today, I read a good article summarising the potential of Malaysia having twin deficits soon. If you do not intend to read the content, in brief, this twin-deficit will not be happening within 2016. Overall, the article is a little long and thus the summary plus my personal opinions as below, the good, the not so good and the still okay. If you prefer to read full article, then it’s here. Summary as below.

The Good.  Malaysia is still running a current account SURPLUS. Our exports are still higher than our imports. In brief, we import raw materials, added value and export them for a higher price than we paid for. So, we have a surplus. Yes, there are LOTS of countries running fiscal deficits today which have by far higher sovereign rating than Malaysia. Don’t ask me why…

The Not So Good. World growth is really lethargic. Our exports cannot increase because the world demand is low. Imports will increase as we need to build MRTs and LRTs plus all those foreign labour are sending money home….. Delay the MRT and LRT? The answer is NO. Let’s push forward.

The Not so Good. Malaysia has been running a fiscal deficit for the past 18 years. In other words, as soon as the trade account surplus becomes deficit, Malaysia would have ‘twin-deficits.’ Double whammy so to speak.

The Good.  Hong Leong Investment Bank Research economist Sia Ket Ee said, “The risk of twin deficits is not so apparent for this year, but as we move into next year, Malaysia will face the likelihood of twin deficits. LNG are being exported at lower prices and yet imports of capital goods are increasing with Mass Rapid Transit (MRT) Sungai Buloh-Kajang Line’s final stage.

The Not so Good. UOB Malaysia economist Julia Goh said, “The downside risk has certainly increased because the picture of the external environment is very negative.” Again, we can’t control the world.

The BAD. If Malaysia falls into a twin-deficit situation, it could trigger a credit rerating for Malaysia.  If this happens, Ringgit may weaken further. For those whose children are studying in the US, this may be a big issue. UK and Australia? For those in the UK, it has been ‘better’ after Brexit. As for Australia, do take a look at some of its economic outlook to understand more.

The Good. Mier executive director Dr Zakariah Abdul Rashid shared MIER’s projection.  Malaysia’s current account surplus for 2016 in total will likely narrow to RM11.3bil, or 1.2% of the country’s gross national income (GNI), from RM34.7bil, or 3% of GNI. (Yes, still in the black lah)

The good. HLIB’s Sia said that the Malaysian government has a little more flexibility to pump-prime the economy because in the recalibrated Budget 2016, the crude oil price was assumed to be US$30 – US$35 per barrel. In a recent report, Goldman Sachs predicted that the crude oil price will remain in the U$45-U$50-a-barrel range till mid-2017.

Happy following.

written on 30 July 2016

Next suggested article:   An insiders look into the property market 2016

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