The Malaysian Ringgit has collapsed in the last 6 months. This is largely due to the large amount of consumer and government debt (that I mentioned were problems for the Malaysian economy previously) with a large amount of that debt help by foreigners, the collapse of the natural resource prices (oil and gas and others) and dumping of Malaysian assets by investors losing confidence in Malaysia’s government and economy.

The economy is actually surviving better than you could hope given the problems listed above. The economy continues to grow, even if the rate of growth has decreased. The most serious problems remain the high debt level and finding some way to replace natural resource income. It also puts a spotlight on corruption problems which are easier to ignore when economic growth is strong.

The chart shows the recent collapse of the Ringgit versus the US $ (the chart shows the 10 year history of exchange rates). The Ringgit has collapsed not just against the USD but also other currencies (for example reaching an all time low against the Singapore $).

Malaysia still has strong potential but the risks have increased greatly. The collapse of the Ringgit is an indication investors have lost confidence in Malaysia’s ability to address the long term issues with the economy. Part of the problem is natural resource income (including oil and gas and palm oil) have allowed Malaysia to not address issues and still prosper. Without very strong natural resource pricing propping up the economy the debt load and lack of confidence proved too great and the Ringett collapsed.

Fixing the economy so things don’t get much worse is extremely important. If Malaysia can cut government and personal debt levels and build credibility that building business success is more important than siphoning off large amounts in corruption Malaysia can recover. But the leeway for not mistakes and corruption are much less than were 3 years ago.

A post I wrote in 2013 spelled out the factors I thought were most important for the future of the Malaysian economy (focused on a view of Iskandar). The top factors I listed were: reducing speculation in luxury housing in Iskandar, reducing government debt levels, reducing consumer debt levels, increasing the number of high paying jobs in IM, increasing the tax base (the sales taxes make sense) and transportation.

Those are still important. The speculation in luxury housing has been somewhat addressed by the market and is now a much less important risk to the economy. One of the best things in the last years has been instituting and retaining the sales tax (even though I understand people never like having to pay taxes).

The only thing Malaysia can realistically do about the risk of natural resource pricing is strengthen other areas of the economy and reduce debt. I think pricing will return but Malaysia faces a year or longer of poor natural resource pricing (most likely). Due to falling natural resource prices and the collapsing Ringgit Malaysia’s ability to afford corruption has decreased. And the countries reputation has been tarnished in the last year. The real and perceived corruption issues will harm the economy so it is more important than it has been to reduce the corruption and make those action visible and increase transparency to show the markets corruption is being addressed.

Malaysia’s economic future is still has great potential. But the risk of struggling for years without the economic gains that could be achieved have increased greatly in the last 3 years. That makes it much more important today to take the proper economic steps even if that means taking difficult actions. Retaining the sales tax is one positive step. Addressing the graft that increases costs for everyone through inflated prices on government projects is another that must be addressed. If it isn’t Malaysia can still do ok but will likely do no better than average among ASEAN economies which would be a shame because Malaysia was set to be close to the top in economic gains in ASEAN from 2010 to 2025.

The struggles with the Chinese economy also weighs on the potential for Malaysia. I think China will do well over the next 10 years. But we may well have a year or two of issues while China shifts to much slower growth. And if we have a global shock to the global economy (which is very possible – though China, the Euro, another financial crisis or many other possibilities) Malaysia finds itself in a much risker position today than it should be (if it had paid more attention to diversifying the economy, reducing corruption and lowering debt 7 or 8 years ago). The efforts to diversify the economy and reduce corruption have been decent but didn’t achieve results as good as could have been done. Natural resource prices, decent global and regional economic and property speculation helped make things look pretty good even without as great strides as one would hope for in those areas. Now Malaysia has to move into the future from a much risker position than it could have been in if things had been done differently.

Related: Pursuing a Growing Economy While Avoiding the Pitfalls That Befall to Many Middle Income Countries – The Potential of Iskandar is Very High but Investing in Iskandar has Risks – Iskandar Housing Real Estate Investment Considerations (2011)