Malaysian money head overseas in Q2

Malaysians invested more money abroad than what the country managed to attract as foreign direct investment in the second quarter of this year, said a report by CIMB released today.

Direct investment abroad (DIA) by Malaysian companies came in at RM6.2 billion, out-pacing the RM5.9 billion in foreign direct investment into the country.

The flow of money heading out in the second quarter saw a sharp increase from the first quarter of this year when only RM3.8 billion was recorded as DIA.

In the first quarter, Malaysia managed to attract RM5.1 billion in foreign investments, compared with the RM3.8 billions Malaysians invested abroad.

While Malaysians are sending more money abroad, Malaysia’s balance of payments deficit dropped sharply from RM19.6 billion in the first quarter to RM1.9 billion in the second quarter of the year.

“Overall, the strength of financial account remains weak and a sustained net inflow of capital would depend on the successful implementation of the New Economic Model (NEM) and Tenth Malaysia Plan,” said the CIMB report.

The Najib administration has been trying to open up the economy in a bid to make it a high income nation but was met with opposition from conservative vocal Malay rights group Perkasa which wants the status quo maintained despite widespread criticism that four decades of affirmative action has made the nation uncompetitive.

The government will also have to address the persistent net investment outflows as domestic private investment is a key element in its developed high income nation strategy.

The National Economic Advisory Council (NEAC) had submitted Part Two of the New Economic Model (NEM) to the Prime Minister today.

The second and final report from the NEAC was reported to contain 53 key policy measures aimed at eliminating cross-cutting barriers to a high income, sustainable and inclusive economy by 2020. It will be incorporated into the Economic Transformation Programme report to be released next month.

The research report noted that the reduction in balance of payments deficit was largely due to a marked reduction in errors and omission outflows (E&O).

The second quarter RM18.8 billion in E&O was down from RM30.5 billion in the first quarter, reflecting smaller foreign exchange revaluation losses as the ringgit appreciated moderately against major foreign currencies.

The CIMB report also noted that the nation’s current account surplus almost halved to RM16.2 billion in the second quarter from RM30.4 billion in the first quarter due to a lower trade surplus in goods amid widening services outflows.

“Reflecting a softer global demand, we expect the current account surplus will narrow further in the second half,” said the report.

It estimated current account surplus for 2010 to be RM103.2 billion or 13.7 per cent of GDP down from RM107.7 billion or 14.3 per cent of GDP previously.

The report said that E&O as a percentage of total merchandise trade and excluding foreign exchange revaluation had widened to between 4 and 6 per cent in the first half of the year as compared with 0.3 and 3 per cent during the period 2001-2009.

“As a rule of thumb, an “E&O” of not more than 5.0 per cent of total merchandise trade suggests no strong evidence of massive capital flight,” said the report.

Source: Malaysia Today.

Here is my analysis. Capital movement is easily tracked with capital account balance in balance of payment.

Malaysia is in deficit of capital account balance since 1974 and according to economics, interest differential is the main determinant of capital movement.

Malaysia's OPR is at 2.75% currently which is very low compare to other developing countries such as the BRIC, other south America countries and other east Asia countries.

That means Return for investing in Malaysia (Portfolio investment or Foreign direct investment) is too low relative to the risk (higher risk of uncertainty in developing countries).

Currently Malaysia is in a long streak of balance of payment surplus since 1999 as the current account balance surplus offset the deficit in capital account.

So, in conclusion, this is not a serious problem for Malaysia economy as most developing countries have deficit capital account balance (inflow of capital lower than outflow of capital) and current account surplus. Malaysia have much bigger problem in Government budget deficit as both central bank and government don't really know how to deal with it!