Why Malaysians put their money ABROAD

It is a fallacy to say that foreigners are largely responsible for the outflow of the ringgit. They cannot be blamed solely for the dwindling reserves of Bank Negara.

A look at the numbers suggests that some 45% of the outflow in capital could be attributed to Malaysian companies and individuals.

A year ago – end-July 2014 to be specific – Bank Negara’s total reserves were at US$131.8bil. A year later, it is at US$96.7bil – a reduction of US$35bil.

The fall in reserves has coincided with the weaker ringgit and the falling stock market. At the time of writing, the ringgit was down to RM4.18 against the US dollar, while the stock market was seeing some respite after having shed 172 points since the beginning of the month.

Fingers quickly point to portfolio outflows – described crudely as hot money in the stock market that moves in and out seeking quick returns.

Last year, Bursa Malaysia saw an estimated RM6.7bil in net outflow, and so far this year, it is estimated that another RM13bil has gone out on a net basis.

The outflow is close to RM20bil – or US$5.2bil based on an exchange rate of RM3.80 to US$1 – if the net flow of money last year and the first seven months of this year are taken into account.

The other area where foreigners usually put their money in is in government debt papers.

Based on Bank Negara’s latest report, foreigners’ total holdings of Bank Negara Bills, Treasury Bills and Malaysian Government Securities – both conventional and sukuk – amounted to RM206.8bil as at end-July. A year ago, the figure was at RM257.3bil.

What this means is that over the last one year, foreign holdings of government debt papers have reduced by RM50.5bil or US$13.5bil at a conservative conversion rate of RM3.80 to US$1.

Put together the portfolio flows of US$5.2bil and reduction in foreign holdings of debt papers of US$13.5bil, the total amount comes to less than US$19bil.

Considering the total fall in reserves over the last one year is US$35bil, that leaves another US$16bil unaccounted for.

A large portion of this are likely corporates, Government-linked companies, pension funds, provident funds and even individuals who have invested outside the country for various reasons.

It ranges from seeking higher returns for their money to financing their child or children’s education overseas.

Can they be blamed?

No, not really.

The primary reason why money is put outside is to garner higher returns in a more predictable environment.

A more predictable environment means less volatility and less risk. Lower risk means lower returns.

But strangely, Malaysians are prepared for lower returns when they put their money outside the country, beginning a few years ago.

Even as the ringgit appreciated against the US dollar since 2009, money went into property and stocks in the United States, the United Kingdom and Australia. It was largely from corporates.

Then, except for Australia, the returns in the UK and the United States were poor compared to Malaysia.

Both the countries were suffering from the aftermath of the global financial crisis in 2008. Interest rates were low, bad debts had increased, yields on properties were low and the stock market was jittery.

Despite all the negative factors, many put their money abroad because they knew that these countries had the right policy measures to nurse the economy back to health.

It was the sheer confidence that these countries had earned that saw them attract funds even in bad times.

The policies put in place in these countries are predictable and they practise a high level of governance. The public institutions are strong and time-tested to ensure that the country is able to withstand economic upheavals.

For the ordinary folk, the returns from putting their money overseas are not only for monetary rewards. It’s also for non-financial gains.

For instance, when parents send their children overseas for education purposes – which is quite common – it is an investment on the child hoping he or she would do better in their careers.

Another area of investment that has appealed to ordinary folk is investing in properties outside the country. The popular destinations are the UK, Australia and Singapore.

The UK, especially London, is a financial centre and property prices have always been on an uptrend because of scarcity of supply.

As for Australia and Singapore, the fallback is that the economy is not well-diversified. Australia’s economy is largely driven by commodity prices such as iron ore and coal, while Singapore thrives on services.

The rental yields in Australia are more than 6%, but property prices do not appreciate much. As for Singapore, the yields are low, but the potential for price appreciation is high. The UK has a combination of both ingredients.

But both Australia and Singapore are among only nine countries in the world that enjoy an AAA rating by all three rating agencies – Standard and Poor’s, Moody’s Investors Service and Fitch Ratings.

Another country that is among the elite nine is Norway, a nation whose economy is largely dependent on oil and gas (O&G) activities. The Norwegian kroner has depreciated by 20% against the US dollar since the beginning of the year.

But it continues to enjoy an AAA rating because the agencies are confident that the policies to diversify the economy that have been put in place will pay off.

Malaysia is less dependent on O&G compared to Norway.

But the ringgit has depreciated more not only because of capital flows back to developed countries, but also due to domestic issues that have brought about political uncertainties.

Issues such as 1Malaysia Development Bhd and changes in key public institutions that are supposed to provide the checks and balances to the system do not help instill confidence.

We have economic policies that would see us through the present tough times. The fair value of the ringgit is touted to be at about RM3.70 against the US dollar.

However, it will take some time before such levels are reached. To hasten the process, the confidence factor has to be instilled in the people about the economy and the institutions that form the pillars of governance. - ANN