Transcript The External Wealth of Malaysia

The External Wealth of Malaysia
International Balance Sheets,
Global Imbalances and Governance
Andrew Sheng
1
Preliminary analysis
Contents
Introduction
Brief overview of the current
trends in global external position
Global Overview
Regional Perspective
Comparative perspective of regional
countries through the crisis and after
Malaysian Scenario
A closer look into
Malaysia’s external position
Conclusions
Implications for policy
imperatives and future directions
for research and surveillance
2
Introduction
3
Introduction
Financial crises, growing external imbalances and financial
globalisation have resulted in increasing interest in looking at
economies from a balance sheet perspective.
The balance sheet approach focuses on net assets and
liabilities (stock) rather than the IMF practice of looking at
flow variables.
Recently, IMF’s Lane and Milesi-Ferritti* introduced
estimation of external positions for 140 countries from 19702004, presenting a valuable set of data previously not
consistently available for scrutiny. This is a rich data-set.
* Lane, Philip R., and Gian Maria Milesi-Ferretti 2006, "The External Wealth of Nations Mark II: Revised
and Extended Estimates of Foreign Assets and Liabilities, 1970-2004" IMF Working Paper no 06/69, IMF
4
Exciting New Data Source
The balance sheet data, which are derived from flow data and
partially stock data, give us an unprecedented total picture of
inter-connectivity of stock and flow relationships between trading
partners.
In the past, IMF surveillance focused on countries, not on the
linkages and transmission mechanisms of trade and capital
flow shocks.
The Lane and Milesi-Ferritti* estimates allow a rich analysis
of where shocks emanate and how they flow through balance
sheets, creating vulnerabilities that authorities were not able
to detect before such data.
* Lane, Philip R., and Gian Maria Milesi-Ferretti 2006, "The External Wealth of Nations Mark II: Revised
and Extended Estimates of Foreign Assets and Liabilities, 1970-2004" IMF Working Paper no 06/69, IMF
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Global Overview
6
Major trends in global external positions
Three trends are particularly notable:
1. International financial integration has
increased significantly
2. Global imbalances have widened sharply
3. Differences in rates of return between
external assets and liabilities lead to
significant shifts in international resources
* The analyses presented here are mainly drawn from the Lane and Milesi-Ferretti (2006) dataset.
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Financial Globalisation Rising
International asset trade increased markedly, especially since mid1990s. Total foreign assets and liabilities in most countries are much
higher than the level of GDP
% of GDP
350
300
250
200
Growing Financial Integration:
Debt Instruments (assets + liabilities)
United States
Japan
Europe
East Asia ex-Jpn
Asian Tigers
Others
150
100
50
0
1980
1982
1984
1986
1988
1990
1992
Source: Lane and Milesi-Ferretti (2006)
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1994
1996
1998
2000
2002
2004
Financial Globalisation in Equity instruments
This heightened financial integration is true for both developed and
developing countries, especially in cross-border equity holdings
% of GDP
200
150
100
Growing Financial Integration:
Equity Instruments (assets + liabilities)
United States
Japan
Europe
East Asia ex-Jpn
Asian Tigers
Others
50
0
1980
1982
1984
1986
1988
1990
1992
Source: Lane and Milesi-Ferretti (2006)
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1994
1996
1998
2000
2002
2004
Global Imbalances Widening for US & EU
Recent years saw sharp widening of global imbalances
Global Perspective: Net External Positions
% of group GDP
40
United States
30
20
Japan
Asia ex-Japan
Europe
10
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
-10
-20
-30
Source: Lane and Milesi-Ferretti (2006)
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Asia and OPEC are now net creditors
Japan, emerging Asia and oil producing countries are clear
creditors, while the United States saw sharp deterioration in net
external position. The rest of the world are essentially net debtors.
Growing Imbalances: Net External Positions
USD trillion
2.00
1.50
1.00
0.50
0.00
1970
1972
1974 1976
1978
1980
1982 1984
1986
-0.50
-1.00
United States
-1.50
Japan
Asia ex-Japan
-2.00
Europe
Australia and Canada
-2.50
OPEC
Others
-3.00
Source: Lane and Milesi-Ferretti (2006)
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1988
1990 1992
1994
1996
1998 2000
2002
2004
Rate of Return Differentials Matter
Differences in rates of return on assets and liabilities significantly affect
net external positions of countries and lead to shifts in resources across
borders
US ‘superior’ return differential explains its relatively stable net external
position despite massive net external borrowings in recent years
Asset Returns
Returns on Liabilities
Return Differentials
1995-1999
2002-2004
1995-1999
2002-2004
1995-1999
2002-2004
United States
11.8
9.6
10.5
0.9
1.3
8.7
Japan
6.2
2.8
10.1
5.8
-3.9
-3.0
Euro
-4.2
-1.0
-3.2
Malaysia
-0.1
13.2
-13.4
Notes:
1. Figures are in real domestic-currency terms
2. Malaysia figures are returns on direct investment only for 2000-2004, due to the lack of publicly available financial account flow data.
Sources: Lane, Philip R., and Gian Maria Milesi-Ferretti, 2005, “A Global Perspective on External Positions" IMF Working Paper no 05/161,
IMF; Author’s Estimates
12
Regional Perspective
13
Onset of the Asian Crisis
Except for Korea, countries affected by the crisis saw significant
worsening of net foreign positions prior to the crisis, breaching
negative 60% of respective GDPs.
Onset of the Asian Crisis: Net External Positions
% GDP
0
-20
-40
-60
-80
Thailand
Malaysia
-100
Indonesia
Philippines
-120
Korea
-140
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source: Lane and Milesi-Ferretti (2006)
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After the Asian Crisis
After 1998, net foreign positions improved in all crisis countries, but
Malaysia made the most progress, putting the country’s external
balance sheet virtually at balance.
Onset of the Asian Crisis: Net External Positions
% GDP
0
-20
-40
-60
-80
Thailand
Malaysia
-100
Indonesia
Philippines
-120
Korea
-140
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source: Lane and Milesi-Ferretti (2006)
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A Wider Comparison
Except Korea, the crisis countries clearly have very different net
external positions compared to the ‘Asian tigers’
China was relatively unaffected by the crisis, and enjoyed improving
net external position due to peg to dollar
Net External Positions: Malaysia and the Rest
% GDP
100
50
0
-50
-100
Th, Ph & In
Malaysia
Sg, HK, Tw & Kor
China
-150
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source: Lane and Milesi-Ferretti (2006)
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China: Currency Peg forced Structural Adjustment
China’s GDP powered ahead during and after crisis, while others only
recovered to pre-crisis level in the past two years
China and the Crisis: Nominal GDP (US$)
Num ber of tim es
of 1990 level
4.5
4.0
3.5
China
Singapore
Malaysia
Korea
Th, Ph & In
3.0
2.5
2.0
1.5
1.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Lane and Milesi-Ferretti (2006)
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China: FDI driver of growth & competitiveness
Stock of FDI liabilities relative to GDP have declined for crisis
economies since 1998, while FDI to China kept on expanding…
China and the Crisis: FDI Liabilities Stock (% of GDP)
Num ber of tim es
of 1990 level
7.5
6.5
5.5
4.5
China
Korea
Th, Ph & In
Malaysia
3.5
2.5
1.5
0.5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Lane and Milesi-Ferretti (2006)
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Malaysian Scenario
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Net External Position: Composition
The profile of foreign asset for Malaysia evolved considerably from
1970 to 2004.
The 1980s witnessed large buildup of debt liabilities.
Malaysia's Net External Position: Composition
% net external position
total = 100
60%
40%
20%
0%
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
-20%
-40%
-60%
-80%
Reserves
Net debt (portfolio debt + other investm ents)
Net FDI
Net portfolio equity
-100%
Source: Lane and Milesi-Ferretti (2006)
20
Net External Position: Composition
The 1990s saw an increase in net portfolio equity liabilities
% of GDP
60
Malaysia's Net External Position: Composition
40
20
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
-20
-40
-60
-80
-100
Reserves
Net debt (portfolio debt + other investments)
Net FDI
Net portfolio equity
Source: Lane and Milesi-Ferretti (2006)
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Net External Position: Composition
After the crisis, Malaysia saw buildup in foreign reserves and
overall improvement of net external position
Net External Position: Composition
% GDP
80
Net portfolio equity
Net FDI
Net debt (portfolio debt + other investm ents)
Reserves
60
40
20
0
1970
1973
1976
1979
1982
1985
-20
-40
-60
-80
Source: Lane and Milesi-Ferretti (2006)
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1988
1991
1994
1997
2000
2003
Net External Position: Composition
Composition of Malaysia's Net Foreign Assets, 2004
Portfolio equity
2%
FDI
19%
Portfolio equity
20%
Portfolio debt +
Others
40%
Foreign reserves
51%
Portfolio debt +
Others
28%
FDI
40%
Foreign Assets
Foreign Liabilities
Source: Lane and Milesi-Ferretti (2006)
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External Wealth and the Economy: Some Observations
Income
Total foreign assets and liabilities (% of GDP), especially the former, have
grown in line with income. This suggests a positive relationship between level
of income and the holding of foreign assets
Income versus Foreign Assets and Liabilities
RM ('000)
% of GDP
18
16
14
140
GNP per capita (LHS)
Total Foreign Asset
120
Total Foreign Liabilities
100
12
10
80
8
60
6
40
4
20
2
0
0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Sources: Lane and Milesi-Ferretti (2006); Department of Statistics, Malaysia
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If NEP worsens to -50% of GDP, crisis looms
Vulnerabilities
Both cases of crises (1985, 1997) were preceded by bouts of worsening net
external position, both breaching negative 50% of GDP
%
0
1980
Net External Position and Real GDP Growth
%
12
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
-10
8
-20
4
-30
-40
0
-50
-4
-60
-70
Net External Position (% of GDP)
-8
GDP Grow th (LHS)
-80
-12
Sources: Lane and Milesi-Ferretti (2006); Department of Statistics, Malaysia
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Real Effective Exchange Rate & NEP
Net external position shows a negative correlation with REER, pointing
to a probable link between exchange rate policy and the improvement
in external position after the crisis
Net External Position and Real Effective Exchange Rate
Index (2000=100)
130
Index (2000=100)
130
% GDP
0
% GDP
30
Correlation: -0.65
Correlation: -0.61
20
120
120
-20
10
110
110
0
-40
100
100
-10
90
-60
90
REER (LHS)
Net External Position
80
REER (LHS)
Change in Net External Position
80
-80
-30
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Sources: Lane and Milesi-Ferretti (2006); Bank for International Settlement; Author’s estimates
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-20
Public Investment associated with Debt + FDI growth
Total Debt Liabilities versus Gross Fixed Capital Formation
Correlation Coefficient (rolling 10-year window)
1.0
Investment
Capital formation, particularly
public investment, showed
very significant positive
relationship with foreign debt
and FDI liabilities
0.9
0.8
0.7
0.6
0.5
0.4
0.3
total investment
public investment
0.2
0.1
0.0
1984
The relationship was clearest
in late 1980s up to 1998, in
which up to 90% of variations
in investment can be
explained by changes in
foreign debt liabilities
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Total FDI + Debt Liabilities versus Gross Fixed Capital Formation
Correlation Coefficient (rolling 10-year window)
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
total investment
public investment
0.2
0.1
0.0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Note: Calculated as correlation between rate of change of respective
nominal variables, investment variables lagged 2 years.
Sources: Lane and Milesi-Ferretti (2006); DOSM; Author’s estimates
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Foreign Portfolio Flows drive Equity Market
Foreign Portfolio Equity Liabilities (PEL) and the Stock Market
% of GDP
35
Correlation: 0.94
30
Share Market
Foreign portfolio equity liabilities
are very significantly correlated to
share market movements
index
1400
1200
25
1000
20
800
15
600
10
400
PEL (LHS)
KLSE CI
5
0
0
1980
1984
1988
1992
1996
2000
% of GDP
35
The high level of share market
activities for the period 1992 to
1998 was clearly related to the
steep inflow in portfolio equities
200
30
2004
% of GDP
300
Correlation: 0.87
250
25
200
20
150
15
100
10
PEL (LHS)
KLSE Market Cap
5
50
0
0
1980
1984
1988
1992
1996
2000
% of GDP
35
2004
RM million
500
Correlation: 0.90
30
400
25
20
300
15
200
10
100
PEL (LHS)
KLSE Turnover
5
0
1980
1984
1988
1992
1996
2000
0
2004
Sources: Lane and Milesi-Ferretti (2006); KLSE; Author’s estimates
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Further Analysis: Valuation Effect
The difference between net external position and cumulated current account
provides an estimate of the valuation component* of net external assets,
which represents:
• cumulated value of net capital gains; and
• exchange rate adjustments
% of GDP
40
Net External Position
20
Cum ulated Current Account
0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
-20
-40
-60
-80
Sources: Lane and Milesi-Ferretti (2006); DOSM; Author’s estimates
* Estimate using methodology presented in Gourinchas, Pierre-Olivier, and Helene Rey, 2005, “From World Banker to
World Venture Capitalist: US External Adjustment and the Exorbitant Privilege,” NBER Working Papers 11563, National
Bureau of Economic Research
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Persistent Negative Valuation Effect
Two clear stylised patterns are notable:
•
Valuation effect has been persistently negative suggesting large net capital
losses, especially during period when foreign liabilities was large*
•
Depreciation of ringgit corresponded to worsening valuation effect, as shown
in the shaded areas
% of GDP
USD/RM
0
0.50
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
-5
0.45
-10
-15
0.40
-20
0.35
-25
-30
-35
0.30
Net Valuation Com ponent
Exchange Rate (RHS)
-40
0.25
Sources: Lane and Milesi-Ferretti (2006); BNM; Author’s estimates
* Given the conceptual relationship, this can potentially explain the large return differential between foreign assets and liabilities
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Preliminary Conclusions
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Implications of Analysis
• Malaysia clearly in much better shape and less vulnerable to
external flow shocks - fiscal retrenchment has worked
• Malaysia is not short of savings and therefore
improvement of domestic financial intermediation would
cushion Malaysia against external shocks
• Letting excessive savings flow out, while deepening
domestic intermediation clearly reduces overall risks (equity
return swap).
• We need NATIONAL RISK MANAGEMENT strategy and
policy. The way we finance development and growth
exposes us to different risks. When we are net debtor
(negative NEP), we are exposed to shocks on our debt.
When we are net creditors, we must learn how to manage
our return on assets.
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Implications on Policy
• Policy Management for rich country (net creditor) very different
from poor country (net borrower).
• Example: If net assets are held in USD and liabilities are
in Yen, then Malaysia would be in double squeeze, a
declining asset and appreciating liability.
• This is true not only of Public Sector Risk Management,
but also for Private Sector.
• This makes the case for faster development of Asian
financial markets, so that we can invest in countries and
currencies that appreciate together relative to USD/Euro,
rather than being depreciated on our asset holdings.
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Direction of Research
Increase in international financial integration increases
exposure to external financial shocks, meaning that balance
sheet vulnerabilities will need to be closely monitored.
Thus, research initiatives should be directed to improve
the understanding of the economy through the
balance sheet perspective.
The devil is in the details. We need to study more carefully not
just the components of our balance sheet and flows, but also the
inter-relationship with other economies.
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A Macro-Micro Prudential Framework
Surveillance should be reemphasised to include the balance
sheet approach to complement the existing surveillance effort.
Macro-behaviour have micro-origins, and micro-behaviour have
macro-implications
Comprehensive surveillance would require detailed understanding
of balance sheet conditions of all the different sectors of the
economy, from the financial sector to the public sector and so on.
This means that different departments within the central bank [and
with other regulators] need to have greater co-operation and
information sharing in order to have a holistic view of potential
shocks to the financial system.
* Mathisen, J. and Anthony Pellechio, 2006, “Using the Balance Sheet Approach in Surveillance:
Framework, Data Sources, and Data Availability" IMF Working Paper no 06/100, IMF, provides an
excellent starting point for the understanding of the balance sheet surveillance approach.
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Growth, Stability and Governance
Economic Growth can only occur in environment of political and
financial stability. Central Bank is in charge of monetary stability
and systemic financial stability.
Central Bank challenges are very different from emerging market to
middle income market to developed economy.
As markets get more sophisticated, regulation and oversight of
systemic stability becomes much more complicated. This is
because we are in global competition and local regulation.
You have to help locals compete globally, but you have much
greater difficulty regulating large foreign giants, some of which
may be much larger than the whole economy.
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Learning to trust Market, but carry big stick
In order to regulate market, you have to learn to think how the
market thinks. Hence, there must be greater inter-change of staff
between the regulators and the regulatees.
Example: how do we regulate Hedge Funds who now account for
50%+ of turnover in London and New York?
You have to learn how they operate and use the language they
understand in order to influence their behaviour. Example: Fraga
handling Brazilian crisis.
WTO rules require regulators to use International standards to
regulate financial markets. This means that we must use the Big
Regulators to regulate Big Financial Groups.
In order to compete regionally and globally, we must learn to both
cooperate and compete with the Big Financial Groups.
37
Thank You
Questions to [email protected]
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