Expectations for Malaysia's economy have deteriorated owing to the recent crude oil rout, with the FBM KLCI recently registering its lowest level in 2014 so far. Likewise, the World Bank has revised down its 2015 GDP growth estimate for Malaysia's economy to 4.7 per cent on expectations of moderate private consumption, weaker export growth and lower investments in the oil and gas segment. Concurrently, the slump in crude oil prices also stirred up other issues in Malaysia aside from the turbulence in the equity market.
Below, we will discuss further on some of the issues that have arisen from the recent slump in international oil prices:
1. Ringgit: From RM2.90 to RM3.50 per US dollar
Malaysian ringgit has skidded heftily by 7.95 per cent against US dollar since the second half of 2014. On a year-to-date basis, Malaysian ringgit was the second-worst performing currency among its peers in the Asia region, just behind the Japanese yen.
With the Bank of Japan's continued efforts in expanding the nation's monetary base and sending signals on further stimulus plans, the Japanese en topped the list as the worst performing currency in Asia. While the Japanese yen's huge depreciation can be attributable to the local monetary policy measures, the hefty depreciation of Malaysian ringgit stemmed from the violent swings of crude oil prices. A weakening ringgit could diminish investors real returns, resulting in a reduction of real purchasing power.
2. Risk appetite of foreign investors waned
With the rising expectations of an interest rate hike in the US, foreign investors' appetite for risk began to subside, leading to a massive pullout of their funds from Malaysia as evidenced by net portfolio investment outflows in the first nine months of 2014.
Likewise, capital flight out from Malaysia hastened with the gradual strengthening of US economy and the deteriorating outlook regarding Malaysia's economic growth.
More recently, the Malaysian Industrial Development Finance Bhd reported that foreign investors have been offloading Malaysian equities in the open market over the past five weeks, with the latest week registering the fourth highest withdrawal of RM840 million in a week.
3. Higher yields of Malaysia Government Securities (MGS)
While Malaysia government has been taking measures to reduce its reliance on oil throughout the past few years, oil-related revenues remain to be a significant contribution to the nation's income; oil-related revenues accounted for approximately 32 per cent of the national budget.
With oil-related revenues making up a substantial portion of the government's coffers, the persistent drop in oil prices has compounded the risk that the nation might not be able to achieve its 2015 fiscal deficit target of minus three per cent.
The recent sharp decline in current account surplus has also spurred investors into widespread fear that Malaysia might fall into a 'twin deficit' situation. As a result, markets, especially in the MGS segment, have started to factor in expectations that Malaysia might not be able to achieve its fiscal objective as outlined in the Budget 2014.
Owing to the substantial holdings of foreigners in MGS, Malaysia's financial markets are fairly susceptible to capital outflows. In fact, Bank Negara Malaysia reported a decrease in holdings of MGS by foreigners in October 2014, down by RM3.1 billion as compared to the preceding month; further selling by foreign investors on Malaysia's economic concerns could drive MGS yields higher in the interim, while also weighing on the ringgit.
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