The strategic research firm, best known for its founder “Dr Doom” Nouriel Roubini who predicted the collapse of the US housing market and the 2008 global financial crisis, said that Malaysia had the highest exposure to a pullout of capital as its eurozone and US bank claims amount to more than 25 per cent of GDP.
RGE added that Malaysia was the second most exposed in terms of a demand slowdown in the US, the eurozone and China, making it the most exposed Asian economy overall.
“Malaysia, Taiwan, South Korea and Vietnam appear to be the most exposed to a perfect storm through their trade and financial linkages, while South Korea, Australia, Vietnam and the Philippines appear to have the most policy space to offset such an external shock,” said RGE.
“Taking these two factors together, Malaysia, Taiwan, Japan and Thailand are the most vulnerable of the 10 economies considered in this analysis, while Australia, India, South Korea and the Philippines are the least.”
RGE said that while Malaysian government revenues have increased, the hole in its finances could grow due to “populist” spending and an expected cut in Petronas’ dividends.
“In the run-up to elections, the government is likely to offer more cash handouts in the 2013 Budget, leaving fewer resources for productive investment,” said the report.
“We see the debt-to-GDP ratio reaching 54.6 per cent next year, leaving little room to manoeuvre in the event of an external shock.”
RGE noted that in its most recent effort to boost its popularity ahead of an upcoming general election, the Malaysian government announced a supplementary budget of RM13.8 billion in June, some 80 per cent of which is allocated towards maintaining oil subsidies and raising civil servant wages.
It added that it expects Bank Negara to cut interest rates to 2.5 per cent by the end of 2013 to deal with slowing growth in Europe and China.
Economists and analysts had earlier said that Malaysia’s federal government debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs the country’s resilience to the increasing frequency of economic shocks.
They said that while government debt — currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia — has not significantly impacted the country and its credit standing so far, the volatile nature of global markets may cause sentiment to turn with little warning.
Figures from the Federal Treasury’s Economic Reports show that the federal government’s domestic debt almost doubled in the space of less than five years — from RM247 billion in 2007 to an estimated RM421 billion in 2011 — far outpacing its revenues which only grew 31 per cent or from RM140 billion to RM183 billion during the same period.
Government-backed loans rose rapidly as well between 1985 and 2010 — from RM11 billion to RM96 billion — representing a growth of 8.7 per cent per annum.
Investors in recent weeks have reportedly shown a preference for US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.
Roubini had in May reportedly predicted that four elements — economic slowdown in the US, the debt crisis in Europe, a slowdown in China and emerging markets, and military conflict in Iran — would combine to create a storm for the global economy in 2013.