Economists: Malaysia more insulated from emerging market financial contagion

Economists: Malaysia more insulated from emerging market financial contagion

KUALA LUMPUR,. Malaysia is perceived as more insulated to emerging market (EM) financial contagion risk compared to countries that have high direct trade and financial linkages to source crisis countries, say economists.

RHB Research Institute Sdn Bhd Chief Asean Economist Peck Boon Soon in a research note said the sharp plunge in the Argentine Peso (ARS) following the footsteps of the Turkish Lira (TRY) has raised concerns again about the risk of a contagion effect among emerging economies’ currencies.

“Currencies with the same weak economic fundamentals, like the Brazil real (BRL), Indonesian rupiah (IDR) and Philippine peso (PHP), also face selling pressure, albeit to a lesser degree.

“Despite some similarity and selling pressure, we believe the contagion effect would unlikely spread to this part of the region,” he said.

He said the weak economic fundamentals of the ARS, TRY and BRL are reflected in their twin deficits in both the fiscal and current accounts in the balance of payments, with both Argentina and Turkey suffering large current account deficits that are still deteriorating.

Indonesia and the Philippines are two major Asean countries that also face a similar problem of twin deficits, but the situation is not as serious as in Argentina and Turkey, he said.

Meanwhile, Malaysia and Thailand both enjoy a surplus in their current accounts, he said, noting that their fiscal deficits are well-contained, putting them in a better position to weather the volatility in the financial markets.

MIDF Amanah Investment Bank Chief Economist Kamaruddin Mohd Nor told Bernama that it was observed last week that the negative sentiment against EMs had also indirectly hit the ringgit despite the country’s solid fundamentals.

“Unlike those affected countries like Indonesia and India which experience twin deficits, high foreign holdings and risk of rising commodity prices, Malaysia’s macro indicators remain solid.

“Our current account is still positive and the trade balance is expected to improve in the near term. Nevertheless, if the negative sentiments continue, the ringgit may test the 4.20 level against the US dollar before retreating to the 4.08 to 4.10 level,” he said.

On Friday, the local unit eased to 4.1435/1465 against the greenback from 4.1430/1460 on Thursday.

He also noted that the contagion effect is self-fulfilling, with economic problems in one country prompting investors to sell assets in economies with similar risks.

“The contagion risk could spread via capital markets and also trade. Faltering business confidence leads to a drop in investment and jobs that will affect business activities, consumption and growth,” he said.

On the other hand, Sunway University Business School Economics Professor Dr Yeah Kim Leng said Malaysia is not overly exposed to the contagion in the currency market.

He said Malaysia’s healthy economic fundamentals would help the country to attract foreign investments as its exports remain strong and competitive.

“Overall, Malaysia has sound economic fundamentals which have translated into steady growth, low unemployment and manageable inflation.

“Malaysia needs to reiterate its stand to foreign investors that its fiscal balance and current account position still remain intact,” said Yeah.

He suggested that the country reduce its dependence on foreign currency borrowing in order to minimise the impact of external factors.

“If the government can rebalance the fiscal spending in line with lower expected revenue and remain prudent in spending, I believe we can continue having a positive economy,” he said.

Yeah also noted that Malaysia could withstand any foreign withdrawal of investment as it has over US$100 billion (RM415 billion) in international reserves.

According to Bank Negara Malaysia, the international reserves rose to US$104.4 billion as at August 30 from US$104.2 billion as at August 15, 2018. — Bernama