Malaysia’s Disastrous Capital Flight

Asia Sentinel
by Our Correspondent
11 JANUARY 2010

Money leaves the country on an unprecedented scale

Churches are not the only thing to have been going up in flames in Malaysia. Take a look at the nation’s foreign exchange reserves. They fell by close to 25 percent during 2009 according to investment bank UBS even though the country continued to run a huge surplus on the current account of its balance of payments.

Says UBS: “Question: which Asian country had the biggest FX losses in 2009?” The answer is Malaysia and by a very large margin; we estimate that official reserves fell by well more than one quarter on a valuation-adjusted basis”. It describes the situation as “bizarre” and contrasts Malaysia with other countries with large current account surpluses – Thailand, China, Taiwan, Singapore, and Hong Kong – which have seen their reserves increase – as should be expected.

In short there has been an exodus of money from Malaysia on a scale which surpasses that which occurred during the Asian crisis. Nor is this just a mirage. The decline is also reflected in a sudden decline in base money supply – even while, thanks to Bank Negara, broader M2 has continued to grow modestly.

Who is responsible for this massive outflow? And where has it gone? The questions cannot be answered from the data and probably will not be by a government that knows its own state-controlled enterprises, headed by Petronas, may probably be responsible for part of it. The more certain reason however is the outflow of local private capital has been taking place on an unprecedented scale in response to political instability, massive official corruption and discrimination against non-Malays.

This capital bloodletting has as yet attracted little attention because Malaysia’s foreign debt levels had declined dramatically since the Asian crisis and its reserves reached very healthy levels. So the outflow has not disturbed the financial markets, and Bank Negara has easily been able to keep interest rates low and the currency strong.

But unlike 1998, when the exodus of hot foreign money was a major contributor to the crisis, foreigners cannot be blamed. There is little speculative interest in the ringgit and the Malaysian bourse has rather fallen off the map as far as foreign institutional money is concerned. The BRICs, India, China, Russia, Brazil have taken the merging market lead once dominated by Southeast Asia.

Nor is there much evidence that the Middle East money which was supposed to be flowing into Muslim Malaysia, into holiday apartments or Johor’s massive Iskandar development zone, has been much in evidence. Malaysia’s one recent success, the development of its sukuk (Islamic bond) market may have caused more capital outflow than inflow. At any rate any overall net inflow of foreign capital whether into bonds, equities, factories or real estate has been dwarfed by the exodus of Malaysian money.

The latter is reflected in the weakness of private sector investment, which now trails public investment. Indeed it explains why the economy remains weak despite very healthy prices for most of Malaysia’s commodity exports. The nation has been running a current account surplus of more than 10 percent of gross domestic product for the past decade and hit about 17 percent of GDP in the year just ended. Initially this surplus was needed to pay down debt accumulated during the mid-1990s Mahathir boom years and to rebuild foreign exchange reserves to healthy levels.

But subsequently it became simply a consequence of the weakness of private investment. Domestic investors were discouraged by the corrupt and warped system and foreigners moved to China and elsewhere. GDP growth has become ever reliant on government stimulus – again racially biased in its allocation — financed by a persistently large budget deficit.

Meanwhile, publicly controlled capital has been rushing overseas. Petronas has been spending its billions in profits around the world as it attempts to become a major global player – at the expense of Malaysian citizenry in general and the oil and gas producing states in particular. Other government-controlled entities such as Malayan Banking Bhd have been bidding top dollar for foreign assets – such as Bank Internasional Indonesia.

Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.

The 2009 reserves loss may have had some specific cause which will not be repeated. But it has merely served to underline a dismal trend which has been in evidence for the best part of a decade. Malaysia has so far been saved from itself by the commodity price gains of the past five years – with even the late 2008 collapse now largely reversed. Oil and palm oil may be off their peaks but both are now double their prices of five years ago.

It is better not to imagine what will happen to Malaysia if prices collapse to 2004 levels and stay there. Better now to address the real reasons behind capital outflow and lack of private investment.

  1. #1 by Bigjoe on Friday, 15 January 2010 - 7:17 pm

    The ommon thread of the criticism of this thing, is that it is unimpressive. This charactisation is very important in predicting what is likely to happen in the future.

    Basically, this move buys time for Najib. But there is still a ticking time bomb. Its ticking more slowly but its still ticking. If Najib does not act on it, the time bomb can accelerate again and blow up even bigger. The way the culture of irresponsibility is with UMNO/BN including Najib, its will blow up again before GE 13.. My guess is that it won’t take even anywhere close that long.

    So there is clock ticking still for Najib and there is a clock ticking for opposition to quicken the time bomb. The race has only just begun..

  2. #2 by Onlooker Politics on Friday, 15 January 2010 - 7:57 pm

    Najib is probably thinking now, “You people only know how to talk a lot! You talk about capital flight but I know much better than you about it. I too want the foreign capital and the domestic capital to stay back in Malaysia so that I can tell people that something good in my report card, such as telling people that the employment opportunities have been increasing, or at least maintained, during my reign as the Prime Minister! But you know I am POWERLESS because the repatriation of foreigners’ money are beyond my control. The transfer out of domestic capital to foreign countries is also beyond my control because I am POWERLESS to tell people like Robert Kuok not to dispose off his assets in Malaysia and not to channel out his money to mainland China!”

    Then Onlooker asks,”Dato Seri Najib, why don’t you just strengthen the capital control system which has been implemented by Tun Dr. Mahathir in order to tighten up the control on the repatriation of capital out of Malaysia to a foreign country?”

    Najib probably answers, “I am POWERLESS to do that because the current trend is for us to liberalise the capital control so that Malaysia can be made a much more attractive country than the neighbouring countries like Vietnam and Indonesia to foreign investors for making an investment choice!”

    Onlooker asks further, “Dato Seri Najib, why don’t you just give instruction to Bank Negara Malaysia to print much more money in order to create a much higher aggregate domestic demand as a stimulus to accelerate the economic activities and to create much more employment opportunities for several ten thousands of new potential workforce who just graduated from schools, colleges or universities?”

    Najib probably answers, “I am POWERLESS to do that because Dr Zetie of Bank Negara Malaysia has a policy preference to continue pegging Ringgit to the US Dollar at around RM3.30 to RM3.60 against 1 US Dollar!”

    Onlooker asks more, “Dato Seri Najib, What are you going to do next in order to find much more money for purpose of kicking off a few Government infrastructure projects in order to spur the economic activities?”

    Najib probably answers, “I don’t know! I am POWERLESS to persuade the foreigners to buy 1 Malaysia unit trust! I am also POWERLESS to ask Robert Kuok to buy 1 Malaysia Unit Trust. I really do not know what to do next! Probably you should go ask Anwar!”

  3. #3 by boh-liao on Friday, 15 January 2010 - 8:01 pm

    Besides ppl migrating n taking $$ out of 1M’sia
    Corrupt Umnoputras, their wives, n relatives + little Napoleans sent tons of $$$
    Out of 1M’sia throu’ money changers
    Also, money gained fr selling fighter jet engines must b sent out of 1M’sia too
    Can make a movie called ‘OUT OF 1MALAYSIA‘, contact Clint Eastwood

  4. #4 by changeforum on Friday, 15 January 2010 - 9:08 pm

    It is a shame that this report hasn’t been made into a Watergate-level scandal yet. How is it that heads are still not rolling yet?

  5. #5 by Godfather on Friday, 15 January 2010 - 9:11 pm

    First, they told Robert Kuok they wanted Pelangi, so Robert sold it to PNB. Then they told Robert they wanted Malayan Sugar to be given to Syed Mokhtar, so Robert sold it to the UMNO crony. In the meantime, Robert had already sold Perlis Plantations to a S’pore listed entity.

    Malaysian operations aren’t important to Robert Kuok. He continues to invest billions in China. Why worry about a tin-pot country that has no moral values ?

  6. #6 by Onlooker Politics on Friday, 15 January 2010 - 9:12 pm

    Onlooker asks somemore, “Dato Seri Najib, why then don’t you sell much more privatised projects to Syed Mokhtar so that the Federal Government will have much more money to continue spend as economic auspices programme?”

    Najib probably answers, “Syed Mokhtar…Hmmm…I think you should go ask Muhyiddin Yassin. I am POWERLESS to get Syed Mokhtar to buy any privatised project from the Government!”

    Onlooker asks, “Dato Seri, can you cite one or two things in which you are really POWERFUL enough to have some says?”

    Najib probably answers, “Well, sorry, I’m running out of time now. My wife is waiting for me! See you then!”

  7. #7 by Godfather on Friday, 15 January 2010 - 9:15 pm

    Now Tony Fernandes is gonna bid for West Ham – guess it’s with UMNO’s blessings, which means a few hundred millions will get transferred out of Bolehland.

  8. #8 by Onlooker Politics on Friday, 15 January 2010 - 9:36 pm

    Onlooker asks again, “Dato Seri Najib, what do you think about Tony Fernandes? Do you allow him to transfer out several hundred millions Dollars from Malaysia to London?”

    Najib probably answers, “My wife told me that footballing could be a lucrative business, especially during the year of 2010 FIFA World Cup. We can’t give out new betting license in Malaysia due to the political policy constraint. Nevertheless, any Malaysians who can afford to pay are allowed to buy a betting license in England. My wife said that it is going to bring us a good fortune! You know as a Prime Minister, I am POWERLESS to intervene in a business decision which involves only with a public quoted company in Bursar Malaysia. I am POWERLESS to stop people from getting involved with the betting business which operates from a foreign base. I am also POWERLESS to trace who really operates as the biggest illegal soccer game bookie here. Since my wife said that soccer business is going to be a profitable business, why should I stop a Malaysian company from buying out a foreign investment which will bring much profit to it? Legally speaking, I am POWERLESS to stop any Malaysian private sector company from making an investment decision of a foreign choice.”

  9. #9 by Godfather on Friday, 15 January 2010 - 9:45 pm

    How much money did Daim transfer out of Bolehland to capitalise his banking ventures in Africa ? How did the CM of Negeri transfer out RM 10 million through a moneychanger? How many such deals got done in the past 24 months ?

  10. #10 by rahmanwang on Friday, 15 January 2010 - 9:59 pm

    well we have ex MB who was having millions in “pocket” $$ caught at Brisbane airport and MB who send $$ through money changers.What do you expect?No wonder our reserve is dwindling!!

  11. #11 by Onlooker Politics on Friday, 15 January 2010 - 10:04 pm

    Onlooker asks, “Dato Seri Najib, people have been saying that you should ask Daim to transfer back his money from South Africa to Malaysia. Do you have anything to say about this?”

    Najib probably answers, “Daim is welcome to transfer back his money from overseas. But I am not sure how much money he has got now in Africa. Perhaps Tun Dr. Mahathir has a much better clue than me!”

    Onlooker asks, “Dato Seri Najib, what do you have to say about Negeri MB? People complained a lot about him. Are you going to remove him?”

    Najib probably answers, “Negeri MB is one of my best efficient MB. I am considering of getting him transfer to the cabinet and serves as a Minister who oversees the operations of Proton. I know he has a very good hands-on experience in the automobile business. His potential can further be explored if he can be put to the seat in the MITI. However, I must first listen to Tun Dr. Mahathir first about the appointment of him in my cabinet because Proton is still Tun’s baby. I am quite POWERLESS to a certain extent for certain important appointment in my cabinet!”

  12. #12 by Onlooker Politics on Friday, 15 January 2010 - 10:14 pm

    Onlooker asks further, “Dato Seri Najib, but many people said that he transferred out money from Malaysia to London. Are you not going to take action?”

    Najib probably answers, “I have no comment because it is supposed to be investigated by the MACC. I can’t say anything until the MACC has given me a feedback on the findings about the investigation. I am POWERLESS to take action against someone who is still under the investigation by the relevant government authority.”

  13. #13 by -ec- on Friday, 15 January 2010 - 10:38 pm

    we should build up a doomsday indicator, if this presence situation was to continue, how much time will the present bn government bankrupt and fail the country.

    people has tendency of negative thoughts. i bet this doomsday indicator will outperform those kpi/nkra.

  14. #14 by monsterball on Friday, 15 January 2010 - 10:38 pm

    Crooks need to transfer money case the need to run away.
    Businessmen investing overseas…thus transferring money out….means nothing much to invest in Malaysia….or…spreading the wings to other parts of the world.
    Bottom line…money going out is bad sign…lost trust and confidence.
    Now is money coming in..more than money going out?,,,,not so.
    For if it is true…plenty jobs and vacancies should be available and people will be richer and happier.
    If so…UMNo BARU will be riding high…to be almost guaranteed to win 13th GE.
    Bu UMNO keep defending and applying all sorts of stunts and telling half truths to cover their asses…all these months.
    Foremost of all…corruptions arrests and charges are on small fishes and side shows only…which Malaysians are fully aware of.
    Teoh Beng Hock’s murder case had put MACC on the defensive side…which is self explanatory.
    Money flowing out…by crooks …is expected.
    Money flowing out by concern applying “do not put all eggs in one basket”..also natural.
    Money investing by business people to overseas…and not expanding their business in Malaysia…shows lack of confidence.
    Now we need to know.are Americans…British…Australians……Chinese investing into Malaysia.. more than money flowing out.
    UMNO BARU have all the answers and know all the true picture.
    You can bet…UMNO will never tell the truths..always cover up..and find ways to hide the bad news…to cover up their obvious weaknesses and massive lead Malaysia to what is happening today.
    When a country lack the good and confidences of investors…and from the people…it is finished.
    Fortunately..we do have oil money for UMNO to juggle.
    If no oil…Malaysians will be a war torn country…all fighting each other…without UMNO hungers know no laws and orders.

  15. #15 by Onlooker Politics on Friday, 15 January 2010 - 10:39 pm

    //Oil and palm oil may be off their peaks but both are now double their prices of five years ago.//

    Palm oil is now double its price of five years ago but crude oil is now tripple its price of five years ago. This means that the oil palm fresh fruit bunches (FFB) producers in Malaysia will have lesser benefits expected coming from the rising in world commodities prices because the imported inflation caused by heightened cost in crude oil has eaten up the profit coming from the oil palm FFB price increase. Generally speaking, even the landowners in Malaysia are not better off now as compared to 5 years ago!

    Under the BN administration, things will only get more and more expensive and unaffordable to many have-nots!

  16. #16 by riversandlakes on Friday, 15 January 2010 - 10:55 pm

    Petronas has absolutely no right to spend petrodollars that belong to the country and future generations!

    Uncle Lim please champion the point to bring up the example of Norway and emulate it!

  17. #17 by Onlooker Politics on Friday, 15 January 2010 - 10:57 pm

    Another stressful news coming out about Malaysia:

    The US Embassy located at Kuala Lumpur has issued notice of travel security warning on the possible terrorist attack on Americans in the resorts (and transportation to and from) located in isolated areas of eastern Sabah, including Semporna and the islands of Mabul and Sipadan.

  18. #18 by cherasusie on Friday, 15 January 2010 - 10:59 pm

    it all started in 1957 when 3 brothers opened a shop call HARMONY….

    business was so good and they opened branches in east malaysia….

    time flies, these brothers got married and have their own children. among the kids, some are handsome, some ugly, some clever some stupid, some hard working and some plain lazy.

    not long later, the kids all grown up, with mix bag of quality, they all worked in HARMONY, including the stupid, cunning, corrupted, lazy, bigoted etc etc

    when a clever son got a car, other stupid sons also wanted to have cars….if one did not agree, others would complain “my son not a son ah” and worst, the brothers started listening to wives and so everyone for himself.

    Of course, as the big brother, whose name is, incidentally, sounded like our umno, Armno, started, cheating, stealing and did everything possible under the sun to enrich his own family.

    brother 2, Mahua and brother 3, Micky saw things not right, so they also started stealing, bluffing and soon, HARMONY became upside down….business now is mostly left to the immigrants.

    Armno make himself a huge bungalow and think of marrying somemore wives Mahua indulges in Genting and do some business in china, Micky, although living quite ok but still complain duit tak cukup….he got many sons who are lawyers and dr’s, one son got a satellite in the space, one son also own big ‘cheap’ airline and indulges in fast cars.

    foreigners who invested in HARMONY are begining to withdraw but don’t worry, HARMONY is still around, at least for a while…

    Sorry I have to stop writing, there’s smoke coming from desa melawati side, i will check and let you know.


  19. #19 by boh-liao on Saturday, 16 January 2010 - 1:44 am

    Smart ppl who hv RM r transferring their RM out of M’sia
    N changing RM 2 other high value n appreciating currencies, like S$, A$
    D way things go, RM is sinking like a stone
    Soon S$1 = > RM2.5 n RM bcomes banana notes
    Ppl who hv 2 pay 4 their kids’ studies overseas know d folly of keeping their savings in RM
    D curse of Umno B/BN

  20. #20 by monsterball on Saturday, 16 January 2010 - 7:22 am

    Our Ringgit is loosing strength to all neighboring foreign exchange.
    For the past three months…more than 15% lost to Indonesia Ruppiah.
    I send money….monthly fir my maid..and now it is around RM391 for I million Rupiahs,.,.whereas…3 months ago…it was RM 342.
    When have you ever heard any good news?

  21. #21 by yhsiew on Saturday, 16 January 2010 - 8:14 am

    No investor in his right state of mind would invest in a country where is there preferential treatment for a privileged group of people. He will probably make this country the last choice as his investment destination.

  22. #22 by boh-liao on Saturday, 16 January 2010 - 9:45 am

    Exactly, which foreign investors would b so dumb 2 invest in 1M’sia (or is it 2M’sia)
    Bring foreign currency into M’sia, may make some money
    But when they change RM back 2 their original currency, si-pun lah, exchange rate bad
    Also while in M’sia, got 2 face all d robots like Khairul chanting Allah is not God
    Properties may b firebombed, stoned, decorated with paint, cowhead
    Lots of Singaporeans kena burnt big time
    Bot condos in JB many yrs ago, now selling price down, RM to S$ conversion down
    Condos kena broken into, things stolen, no security (all false promises)
    Kena triple whammy teruk teruk, kau pek kau boh

  23. #23 by taiking on Saturday, 16 January 2010 - 11:47 am

    Did anyone read the Star papers yesterday. The mca paper has an answer to the analyst who wrote the report on malaysian capital flight (reproduced above by lks).

    In two words, the answer basically said “its normal”. Nothing unusual, esp during trying economic times. Capital gets moved about. Movement of capital in response to negative economic climate is normal. Who doesnt know? If your left pocket has a hole, you would naturally move the content out to the other pocket. Simple logic. The issue here is the capital movement involved amounts that were until-now-never-seen-before.

    Is this the real reason behind the “all_h” and missing jet engines issues?

  24. #24 by boh-liao on Saturday, 16 January 2010 - 12:56 pm

    Exodus of money goes an exodus of talent
    Hey, exodus is a mild word lah
    Tsunami or earthquake of the Richter scale 8 is more appropriate 1

  25. #25 by riversandlakes on Saturday, 16 January 2010 - 1:37 pm

    Petronas is NOT the government’s cookie jar! If there is a law enacted forcing all of Petronas’ (and other resources) profits into a trust fund owned and protected by the Constitution then the government of the day will be forced to deal with corruption and balance its books.

  26. #26 by boh-liao on Sunday, 17 January 2010 - 3:01 pm

    Expect more RM 2 b transferred out of M’sia by Umnoputras, BNputras n their cronies
    Esp when they sense dat BN is 2 lose in d next GE
    This time round they don’t want 2 b caught with their pants down, like in 308
    Hot, cold, corrupt, sell engines monies MUST b flown out of M’sia b4 too late
    Monies with mistresses must also b flown out
    Daim was smart, 2 learn fr him

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