Pursuing a Growing Economy While Avoiding the Pitfalls That Befall to Many Middle Income Countries

This article provides some interesting data on the Malaysian, Indonesian and Thailand economies.

Malaysia’s High Real Yields Mean Flows Top Peers in Southeast Asia

Foreign ownership of the local-currency notes [in Malaysia] rose by $8.4 billion in the first 11 months, compared with a full-year increase of $4.9 billion in Indonesia and $6.6 billion in Thailand, according to official figures. Malaysia is rated A3 by Moody’s Investors Service, three levels above Indonesia and one step more than Thailand, while its 10-year bonds pay 2.3 percent after accounting for inflation, versus 0.9 percent and 0.1 percent for its respective peers.

Bhd. Malaysia has the lowest inflation in Southeast Asia even as the central bank kept borrowing costs on hold since May 2011, while limiting ringgit appreciation to 0.6 percent over the past two years.

Malaysia exempts foreign investors from paying income tax on bond earnings to boost investment in the $289 billion economy, Southeast Asia’s third largest. Thailand imposed a 15 percent levy in 2010 to stem gains in the baht, while Indonesia, the biggest of the three in terms of gross domestic product, introduced a similar tax of 20 percent in 2009.

Overseas investors held $42 billion of ringgit-denominated government bonds as of November 2012, central bank data show. That compares with $17 billion of baht securities in December and $28 billion in rupiah notes as of Jan. 21, according to data from the Bank of Thailand and Indonesia’s finance ministry.

Malaysia’s worsening fiscal deficit and high household debt, if not addressed, may add downside risk to the sovereign credit rating, said Wong.

Gross domestic product in Malaysia will increase 4.5 percent to 5.5 percent this year, compared with the 5 percent estimated for 2012, according to a government forecast in September. Indonesia’s GDP will rise 6.6 percent to 6.8 percent, Finance Minister Agus Martowardojo said Jan. 14, versus the central bank’s projection of 6.3 percent for last year. Thailand’s economy will expand 4.9 percent, compared with 5.9 percent in 2012, Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said on Jan. 18.

There are some significant strengths in each of these economies and Malaysia has some distinct advantages including a strong natural resource base and fairly small population along with a strong current accounts surplus (exporting more than they are importing).

The biggest worry in Malaysia is the large government debt even after the advantages of selling natural resources. The lower population is an advantage in trying to rapidly increase median income. Malaysia has been doing well at this, but continuing it is not easy and perils have far too frequently interrupted other countries success at doing so. Balancing fast enough growth without tipping over into unsustainable bubbles (often with high leverage) is tricky. Malaysia will have to find a way to decrease the budget deficient while continuing the many things they are doing right to continue to succeed.

Balanced growth is important. Growing numerous strong economic sectors (say health care, manufacturing, natural resource, tourism, education, finance, housing) is critical to creating a robust economy that can grow over the long term even as individual segments suffer. It seems to me the housing sector is a bit over invested in which is a risk. Making sure to develop an economy that provides many good jobs is the key (as a strongly diversified economy will – for all different types of workers, highly education, technically skilled, vocational trained, even unskilled). Lots of expensive houses people can pay for has created many problems recently all over the globe, Malaysia hasn’t experienced that yet but it seems to me there is a risk of that problem. Avoiding that drain (overbuilding housing) will be key to how rapidly median income can increase in the next 20 years.

Related: Malaysian Economy Continues to Expand, Budget Deficits Remain HighCIMB Takes Aggressive Investment Bank ActionsManufacturing in Malaysia: Bahru Stainless Starts Production

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