Malaysia's economy has devolved into a classic credit and asset bubble-driven growth story. Ever wondered why house prices remained strong even during the Financial Crisis and the KLCI rebounded rather quickly following the aftermath.
The emerging markets bubble began in 2009 after China pursued an aggressive credit-driven infrastructure-based growth strategy to bolster their economy during the global financial crisis. Construction activity flourished. Drove a global raw materials boom benefited commodities exporting countries such as Australia and emerging markets. EMs began to attract the attention of global investors who were seeking to diversify away from Western nations that were at the epicenter of the financial crisis.
Rock-bottom interest rates in the U.S., Europe, and Japan, combined with the Federal Reserve’s multi-trillion dollar quantitative easing programs encouraged a $4 trillion torrent of speculative “hot money” to flow into emerging market investments over the past four years.
A global carry trade arose in which investors borrowed at low interest rates from the U.S. and Japan, invested the funds in high-yielding emerging market assets, and pocketed the interest rate differential or “spread.” Soaring demand for EM assets led to a bond bubble and ultra-low borrowing costs, which resulted in government-driven infrastructure booms, alarmingly fast credit growth, and property bubbles in numerous developing nations.
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| Foreign holdings of ringgit-denominated bonds hit an all time high |
While it is true that Malaysia’s $303 billion economy has been growing at an average 6 percent rate in recent years. But it is also due in large part to a growing government and household credit bubble.
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| Skyrocketed debt after an aggressive stimulus package was launched to bolster the country’s economy during the Global Financial Crisis |
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| Malaysia’s government has been running a budget deficit since 1999 |
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| No surprise to see an inflating household debt bubble when Malaysia’s bank lending rate is at record lows |
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| Ultra-low interest rates have caused Malaysia’s private sector loans to increase dramatically since 2008 (it looks exponential and no longer linear) |
Malaysia’s household credit bubble is helping to fuel a consumer spending boom. Malaysian car registrations are up by 50 percent since 2008. With interest rates @ rock bottom (< 4%) how expensive can it be to borrow?
Malaysian corporate leverage, which includes corporate bonds and bank loans, is also rising at an alarming rate, reaching 95.8 percent of GDP in 2013 from 79.9 percent in 2007. (based from Forbes analysis). Like most other countries that are part of the emerging markets bubble, Malaysia has a property bubble in addition to its credit bubble. See the parabolic rise of overall Malaysian property prices.
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| Source: Global Property Guide, the real bubble began in 2009. |
Accounting for nearly half of all household debt, soaring mortgage loan growth is a primary reason why Malaysia’s household debt is increasing at such a rapid rate. With the recent turbulence; lower Ringgit, lower Stock Market, lower Palm Oil, lower Oil, more gloom looks more probable, there is simply no catalyst to turn the negative perception around. I would say we are still considered lucky as one remaining factor: unemployed % remains low. People are still surviving it seems (note I did not say 'flourishing').
The way I see it at the moment, three factors that could POP us.
[1] People start to losing jobs (retrenchment, companies moving out or stop hiring), we would begin to lose the economy, just like 1999 companies and people simply can't service any loans.
[2] When China’s economic bubble pops and/or as [3] global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place.
Berhati-hati la....
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