The current account balance is a gauge for the state of the economy and if it goes into a deficit for an extended period, it affects everything from wages to the price of vegetables.
Malaysia’s current account balance still shows a surplus but the bad news is that it has been declining steadily from 2014.
Economist Ali Salman said that the surplus dropped by more than half or 57.75%, from the fourth quarter of 2016 to the first quarter of this year.
If this decline is not addressed, it will mean years of tepid growth and hit the pockets of ordinary Malaysians. Economists said these are among the impacts of a declining surplus:
* It makes it harder to create new jobs and sources of income for citizens thus, curbing their spending power.
* It saps investor confidence, which can then weaken the ringgit.
* A weak ringgit would make imports, such as food and goods, more expensive and drive up supermarket prices.
* The worst part is that the above factors can compound and feed off each other, thus, leading to slower overall growth.
“(This then) becomes a vicious cycle of poor growth and rising inflation which can lead to social unrest,” said economist Ramon Navaratnam.
According to the website Investopedia, a country’s current account consists of its trade balance (exports minus imports), income from abroad and net current transfers, including remittances by foreign workers.
Ali of the Institute for Democracy and Economic Affairs (IDEAS) said the current account contains four components – the goods account, services account, primary income and secondary income.
“The current account balance decreased by about 57.75% from the fourth quarter of 2016 to the first quarter of 2017, with a total loss of RM 7.2 billion,” said Ali, who is IDEAS head of research.
According to the Malaysian Institute of Economic Research (MIER), the country’s current account surplus stood at RM48 billion for 2014. It declined to RM34 billion in 2015 and RM25 billion in 2016.
MIER executive director Prof Zakariah Rashid said the decline is primarily caused by the weak global demand for Malaysian exports, its uncompetitive maritime industry and the prevalence of unskilled foreign workers.
“Weak global commodity prices of palm oil, natural gas and crude oil as well as deteriorating competitiveness in its manufacturing base have weakened export performance,” he said.
This is reflected in declines in the country’s goods account and services account, said Ali.
The goods account decreased by 18.93% from the previous quarter, while the services account slipped by 15.29%, he said.
The country’s primary income also went down by 7.19% compared with the previous quarter and is already registering a deficit.
Although overall, Malaysia is still exporting more than it is importing, said Zakariah, this trade surplus is deteriorating.
Given that Malaysia is a maritime country, a big portion of the services account comprises of shipping services but this is where the country falters.
“Less than one-third of the ships plying the Malacca Straits used the services of Malaysian ports. Similarly, only one-tenth of our volume in international trade was shipped by Malaysian ocean liners.”
Combined, Malaysia still records a surplus in its goods and services accounts, said Zakariah. But this declining surplus is “a worrisome trend”.
The other “worrisome trend” is the large number of foreign workers who make up one-third of the labour force, said Zakariah.
When they remit what they earn here to their home countries, this drives down the country’s primary income account, which currently records a deficit.
“This deficit is a reflection of the structural weaknesses in the maritime industry and labour market.”
In the long run, a current account that slips into negative territory will sap economic vitality, said Ali of IDEAS.
“Foreign investors will be demotivated to invest in Malaysia and demand weakens for the country’s assets, including government bonds.
“As foreign investors withdraw investment, the national currency will lose value relative to other currencies. Ultimately, there will be capital flight from Malaysia.”
It is still not too late to prevent this slide as the declining surplus is a sign that certain structural weaknesses in the economy need to be fixed, said Zakariah.
This includes cutting the dependence on unskilled foreign labour and strengthening the maritime services industry.
“Addressing these will certainly bring a rewarding and positive impact on the creation of high-skilled jobs,” said Zakariah. – May 30, 2017.
~ The Malaysian Insight