international-reserves

Malaysia’s foreign reserves plunge (US$ billion) Source: Bank Negara

Over the last eight months, the country’s foreign reserves have dropped by US$34 billion. They have dipped from a high of US$125.8 billion on 30 June 2008 to US$91.6 billion as at 13 February 2009.

Total gross international reserves:

2008

31 Mar               US$120.3 billion

30 June              US$125.8 billion

30 Sept              US$109.7 billion

31 Dec                US$91.3 billion

2009

13 Feb                US$91.6 billion

Let’s zero in on the third quarter of 2008.  During this period alone, Malaysia’s foreign reserves fell by RM31.5 billion.

On the flip side, the balance of payments posted a deficit during the third quarter of RM31.5 billion. (We had a surplus of RM26.2 billion in the second quarter.) In other words, we had to dip into our piggy bank because our payments were more than our receipts during the third quarter.

The breakdown of this balance of payments deficit is as follows:

Current account (trade in goods and services): RM38.7 billion surplus.

Capital and financial account: RM61.5 billion deficit (an increase of 400 per cent from the second quarter!)

Errors and omissions: RM8.8 billion (negative)

Net: RM31.6 billion deficit

So it is clearly that funds have been flowing out of the country from the third quarter onwards.

Now, let’s look more closely at the capital and financial account deficit of RM61.5 billion.

Capital Account:RM millionQ3/08-119-37
CreditRM millionQ3/0861
DebitRM millionQ3/0812638
Financial AccountRM millionQ3/08-61,360-12,270
Direct Investment AbroadRM millionQ3/08-19,851-14,483
Direct Investment in MalaysiaRM millionQ3/0888117,392
Portfolio & Financial Derivatives – NetRM millionQ3/08-56,179-24,020
Other Investment – NetRM millionQ3/0813,7908,841

Source: Bank Negara

We can now see that this RM61.5 billion deficit is largely due to the financial account deficit. To be more specific, direct investment abroad has risen. On the other hand, direct investment in Malaysia has sunk 95 per cent from RM17.4 billion in the second quarter of 2008 to just RM0.9 billion in the third quarter.

Meanwhile, portfolio and financial derivative funds have been fleeing the country. The third quarter of 2008 saw RM56 billion leaving the country, 134 per cent more than the second quarter of 2008.

The figures don’t lie.

That said, the foreign reserves of US$91.6 billion (as at 13 February 2009) are sufficient to cover 7.6 months retained imports and 4 times the short-term external debt of the country.