Falling surplus nothing to worry about – The Star Online

IT’S interesting to note just how the economy is changing. One of the things that drove growth for a long time was the manufacturing sector and the exports of merchandise churned out by factories throughout the country.

The size of trade used to be close to 200% of GDP at its peak, a percentage that made Malaysia one of the most dependent nations on demand for goods from around the world, notably the developed world.

It was this production capability that saw the country register huge amounts of surpluses by exporting more than we imported after the Asian Financial Crisis.

That situation was helped by the peg of the ringgit at RM3.80 to the dollar, a level which is not a distant memory as capital controls have all been disbanded.

As the economy grew over the years, banking officials have pointed out that the share of external trade to GDP, which has shrunk to 145%, doesn’t mean the economy is in trouble.

They point out that the domestic economy has been a driver of growth and that has changed the dynamics of the economy quite a bit. The current account surplus post the Asian Financial Crisis which was 17.1% of GDP in 2008 was now at 6.4%.

In a report this week, CIMB research says that the falling current account surplus is not a source of concern and makes its case as to why it is so.

The reasons for a drop in the current account surplus was attributed to a weak external environment and rising imports as the Economic Transformation Programme (ETP) is implemented.

Imports for large-scale projects such as the MRT and the oil and gas facility in Pengerang will mean that the import bill will rise and weakness in the price of commodities, which is a substantial portion of Malaysia’s exports, will shrink export receipts a bit.

The other change is being seen in the financial account, which basically captures the flow of capital and investments from and into Malaysia.

More Malaysian companies are investing abroad and hence investments abroad are rising. That “negative” instead will be a plus for the economy as profits from those investments are repatriated into Malaysia.

Foreign direct investments (FDI) are increasing from its lows in 2008 and CIMB research notes that Malaysia’s share of FDI in Asean is also improving from that year. But the kicker here has been how domestic companies are investing in the economy, and investments for productive means will also lead to a shrinkage of the trade surplus.

Flows of capital in and out of Malaysia these days are large, and the banker says that the two-way flows it now handles comfortably is much larger than it was during the Asian Financial Crisis.

Are we to worry about the changing dynamics of the economy?

For one, the current account is not falling because the ringgit is deemed overvalued, which would encourage consumption of luxuries and other non-essential items,

The drop in the current account might also reflect somewhat the sentiment changes that we are seeing in the economy. In the early to mid-1990s, the current account oscillated between a small negative and surplus but the economy was roaring. Investments into more productive capacity as the private sector drove the economy kept the surplus and deficit in a small band.

But during the years when the surplus ballooned, it was hard to argue that sentiment of the economy reflected the ever-rising surplus in the merchandise account.

And now, as the economy is displaying a new wave of optimism, with the private sector once again pulling up its socks to invest, the surplus has started to fall.

So, like what the CIMB report says, the falling trade surplus is nothing to worry about.

l Acting features editor Jagdev Singh Sidhu wishes success and safety for our security personnel in Sabah.