In a sea of despair

What is a nightmare today is Malaysia’s household debt hovering around 85% of the GDP


A PICTURE of an empty street at a junction in Bukit Bintang, Kuala Lumpur, on the first day of Movement Control Order (MCO) feels like the apocalypse.

Malaysia is really in waters infested with sharks, piranhas, crocodiles and unknown creatures. Never has the country been in such an unprecedented situation.

During the Asian financial crisis of 1997/98, Malaysia’s economy was battered, ringgit was punished, the stock market index fell to 261 points and oil prices were trading around US$17 (RM74.80) a barrel.

The economy contracted -7.4% in 1998. Interest rates jumped to over 15%, leaving many companies and individuals in financial ruins.

Political uncertainties, the Tun Dr Mahathir Mohamad-Datuk Seri Anwar Ibrahim leadership crisis, the Reformasi movement and daily street protests further exacerbated the economic contagion.

Many wish they will not have to relive the same fallout ever in their life.

It did come though in the size of a watered down tsunami 10 years later. The global financial crisis of 2007/2008 started in the US, triggered by the subprime crisis and pushed the world into a global recession.

Mortgages and investment banks fell faster than dominos and soon found their names engraved on tombstones. The world largest economy was dragged to the days of the Great Depression of the 1930s.

Malaysia’s open economy did not escape the financial tornado. The country’s economic growth contracted -6.2% in the first three months of 2009 and for the whole year, the economy reversed -1.5%.

To mediate the fallout, the government injected US$16 billion into the economy as growth crawled to a turtle pace and unemployment jumped.

Demand for commodities like palm oil, rubber and oil took a beating. Malaysia’s electronics industry almost grinded to a halt like a steam train without water.

But there are stark differences during those two financial fallouts and Malaysia’s current situation.

While the country’s economy was bludgeoned to almost no return during the Asian financial crisis, it was interesting to note that the household debt then was only about 16% of the GDP growth.

What is a nightmare today is the country’s household debt is hovering around 85% of the GDP. Corporate debts will likely hit the country’s total banking system’s borrowings of RM1.7 trillion.

A prolonged economic drought will see bad debts rising despite efforts to slash the Overnight Policy Rate.

Interestingly, during the global financial crisis of 2008/2009, Malaysia was spared the worst due to its oil reserves. Oil prices rushed to US$165 in 2008, which provided enough mullah for the country.

Despite the global crisis that eventually drove crude oil prices to around US$85 a barrel in 2009, it was still high and enough to keep Malaysia’s engine running.

The problem today for Malaysia is more chronic. Oil prices had slumped to around US$22 for West Texas Intermediate and US$29 for Brent (as of afternoon yesterday).

A US$1 drop is estimated to erase RM300 million in revenues for the government, which has a tabled budget of US$62 a barrel for this year. That means the current oil price is only half of the budget.

The government also has little flexibility to inject more money into the economy unless it turns a blind eye to criticism and widens the fiscal deficits to above 4.5%.

Malaysia is not Italy, which despite the latter’s debt of over 135% of the GDP and friendly European Union neighbours, financial stimulus options will be limited.

What is unprecedented though during the previous two financial fallouts, human movements, trades, investment and capital continues to flow without disruptions.

No country imposes lockdown, curfews and movement restrictions. People are prohibited to travel. If people do not travel, investment comes to a stall. Malaysia’s MCO could be extended and shops and businesses would shutter for a longer period.

Triple whammy for Malaysia besides the oil price plunge and flu bug, is the political front. The current government has “a soft majority” unless it can muster the support of more lawmakers in the months to come and build an unshakable dominance in Parliament.

Long-term foreign investors are sensitive to policy changes and political stability, two factors which have drawn hundreds of billions to the country since the 1980s.

It is uncharted waters for Malaysia and the shores seem so far away.

Mohamad Azlan Jaafar is the editor-in-chief of The Malaysian Reserve.