Net investment flow

Since the relaxation of the country’s foreign exchange administration in April 2005, there has been an increase in the outflow of funds from the country. This is mainly due to the aggressive investment of foreign assets by Malaysian companies. To make matters worst, foreign direct investment in Malaysia has shrunk in the same period. This has resulted in a net outflow of RM50.0 billions in the last 3 years.

The main areas of investment abroad by Malaysian companies are banking, telecommunications, power and properties. Between 2006 and now, local banks have invested a total of RM25.3 billion in overseas banking assets.

Partly due to the huge outflow, the healthy external trade balance of RM118.3 billion and RM141.8 billion surpluses for years 2009 and 2008 respectively did not lift the country’s foreign reserve much. It rose only RM17.0 billion in the whole of 2009.

A direct result of the outpouring of funds to buy foreign assets is the reduction of investment at home. To plug the gap, the government has to bump up public spending to keep the economy going. In the process, the government chalked up a huge budget deficit of 7.4% of GDP in 2009.

The world financial crisis hit in 2008. In that year, there was a net portfolio investment outflow of RM84.3 billion from Malaysia. This caused a total deficit of RM118.5 billion in the balance on financial account in the year.

The outflow of funds has diminished the demand for the Ringgit. Consequently, the currency has been weak for the whole of 2008 and 2009. Things seem to have improved this year. Hopefully, it will end the year better.