Malaysia's economic bubble will burst after China's economy takes a tumble and global and local interest rates continue to rise, warned financial analyst Jesse Colombo in the Forbes online magazine yesterday.
Colombo, credited by the London Times for predicting the global financial crisis, noted that Malaysia's high government and household debt is contributing to the credit bubble.
"Malaysia’s bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place," he wrote in the Forbes article headlined "Malaise Is Ahead For Malaysia's Bubble Economy".
"The resumption of the US Federal Reserve’s QE taper plans may put pressure on Malaysia’s financial markets in the near future. Malaysia’s rapidly deteriorating current account surplus due to weaker exports is another worrisome development," Colombo added.
The financial analyst based in New York warned that the coming economic crisis could be far worse than the 1997 Asian Financial Crisis as more countries would be affected due to weak global economy.
"As I’ve been saying even before this summer’s EM panic, I expect the ultimate popping of the emerging markets bubble to cause another crisis that is similar to the 1997 Asian Financial Crisis, and there is a strong chance that it will be even worse this time due to the fact that more countries are involved (Latin America, China, and Africa), and because the global economy is in a far weaker state now than it was during the heady days of the late-1990s," he said.
Colombo said the emerging markets bubble began in 2009 after China pursued an aggressive credit-driven, infrastructure-based growth strategy to bolster its economy during the global financial crisis.
He noted that rock-bottom interest rates in the United States, Europe, and Japan, combined with the Federal Reserve’s multi-trillion dollar quantitative easing programmes encouraged a $4 trillion (RM12.7 trillion) torrent of speculative "hot money" to flow into emerging market investments over the past four years.
Colombo also said surging capital inflows into Malaysia after the Crash of 2008 caused the ringgit currency to rise 25% against the US dollar in just two years and foreign holdings of ringgit-denominated bonds hit an all-time high.
Malaysia’s $303 billion (RM964 billion) economy grew at an average 6% in recent years due in large part to a growing government and household credit bubble and its public debt-to-Gross Domestic Product (GDP) ratio has been hovering at all-time highs of over 50% since 2010, thanks to large fiscal deficits incurred when an aggressive stimulus package was launched to bolster the country’s economy during the Global Financial Crisis, he added.
"After Sri Lanka, Malaysia now has the second highest public debt-to-GDP ratio among 13 emerging Asian countries according to a Bloomberg study," he said, noting that Malaysia’s high public debt burden led to a sovereign credit rating outlook downgrade by Fitch in July.
"Like their government, Malaysian households are also binging on debt, which has caused the county’s ratio of household debt to GDP to hit a record 83% – Southeast Asia’s highest household debt load – which is up from 70% in 2009, and up greatly from the 39% ratio at the start of the Asian Financial Crisis in 1997," Colombo said, adding that the Malaysian household debt has grown at around 12% annually each year since 2008.
"It’s no surprise to see an inflating household debt bubble when Malaysia’s bank lending rate is at record lows," he pointed out.
Colombo said ultra-low interest rates have caused Malaysia’s private sector loans to increase by over 80% since 2008 and Malaysia’s M3 money supply, a broad measure of total money and credit in the economy, was showing a similar worrisome trend:
He also quoted Federation of Malaysian Consumers Associations chief executive Datuk Paul Selva Raj as saying that 47% of young Malaysians were currently in "serious debt" (debt payments amounting to 30% or more of their gross income), something that could catch up with them very quickly.
"Car purchases and credit card debts are among the main reasons for bankruptcy in Malaysia," he quoted Raj as saying. "It’s the culture we live in. There’s a lot of emphasis on status and being 'cool' – but being cool costs money."
Colombo noted that Malaysia’s household credit bubble had been helping to fuel a consumer spending boom with Malaysian car registrations up by 50% since 2008.
Malaysian corporate leverage, which included corporate bonds and bank loans, had also been rising at an alarming rate, reaching 95.8% of GDP in 2013 from 79.9% in 2007, according to the statistics he cited.
The financial analyst pointed out that while overall Malaysian property prices were up sharply and has led to soaring mortgage loans growth which account for nearly half of all household debt and a primary reason "why Malaysia’s household debt is increasing at such a rapid rate".
"Plans to build the tallest building in Southeast Asia, the 118-story Warisan Merdeka Tower, are a major Skyscraper Index red flag," he said.
The Skyscraper Index red flag refers to a Dresdner Kleinwort report in 2009 which showed a correlation between the construction of the world’s tallest buildings and the impending end of business cycles. – October 16, 2013.