Money matters


The outlook is grim I must say.

Underscoring the seriousness of the US debt-payment horror is the fact that as of July this year, Apple Inc’s nett operating cash balance of USD 76.4b far outperformed the entire US as a nation. At the same time, the US, as a nation, had a nett operating cash balance of only USD73.7b. (source: BBC report).

The US government debt is projected by S&P to hit 11 trillion this year, which would be equivalent to 75% of its gross domestic product or all the wealth that the US economy would generate this year. S&P also estimated the debt would increase to $14 trillion by 2015 and top $20 trillion by 2021, which at that point would mean that it will be 85 per cent of GDP.

In a grim postulation, S&P says in a worst-case scenario, US government debt could outstrip all the wealth generated in the world’s largest economy by 2021. (source: here).

With those kind of numbers, it was not surprising at all that the US credit rating was downgraded a notch from AAA rating to AA+. (source: BBC report).

How do all these affect us?

Back home, the numbers aren’t all rosy as well.

As of last year, our national debt was down from RM236.18b in 2008 to RM233.92b. (source: the Star report). That sounds good as it is on a downward trend. However, an analysis of our foreign debts as compared coupled with our domestic borrowings as well as the percentage in the increase of our debts as compared to  the increase in our GDP over several years paints a really worrying picture. See the analysis here.

The points are these:

  1. While our foreign debts decreased from RM236.18b in 2008 to RM233.92b, our domestic debts increased from RM217b in 2006 to RM371b in 2010.

  2. Between 2006 to June 2010, our gross domestic product grew at an average of 6.6% while the total debts grew at an average of 10.2%.

  3. Total debts to GDP ratio therefore increased by 39% from 64% in 2006 to 73% in 2010.

What the above means is that we are borrowing faster than we are producing income.

According to the US Census Bureau, between the months of January to May this year, the US’ exports to Malaysia totals USD6.1b while our exports are worth USD10.5b. The US Department of State’s website shows that he United States is Malaysia’s third-largest trading partner and Malaysia is the eighteenth-largest trading partner of the United States with annual two-way trade amounting to $33b.

The United States is the largest foreign investor in Malaysia on a cumulative basis, and was the largest source of new foreign direct investment in Malaysia in 2010 with direct investment in the manufacturing sector in Malaysia as of year-end 2009 of $15.1 billion, with billions of dollars in additional investment in the oil and gas and financial services sectors of the economy.

Such is the importance of the US to Malaysia. It goes without saying that a US in financial bad shape would inevitably equal to a Malaysia in economic doldrums.

Meanwhile, Malaysia’s Economic Transformation Program (ETP), an ambitious project to convert the country into a fully developed nation by 2020 remains critically linked to foreign investment. The ETP requires annual foreign investment in the range of $11 billion to fund a quarter of the proposed projects. However, average annual investment since 1997 has only been $3.1 billion.

A March 2011 report by Bank of America Merrill Lynch ranked Malaysia the second least popular market after Colombia among global emerging market fund managers. Malaysia, thus, is in no position to project a picture of chaos and disruption to the investors from outside.

In addition, recent well known events, the details of which are all too familiar to many, if not all of us, do not endear Malaysia too well to foreign investors despite strenuous efforts by the government to attract them.

Yesterday, Goldman Sachs revised our GDP forecast for this year from 5.4% to 5% with a similar cut of 0.4% next year from 5.6%. (source: the Malaysian Insider report).

Considering the state of the US economy and its burgeoning debts, the US government might just increase interest rates in order to lessen public spending; impose higher import duties on certain goods; impose some strict import conditions as well as broaden its protectionism policy over some industries.