Lately, after Sri Lanka became bankrupt, numerous messages have been circulating on social media claiming that Malaysia will go bankrupt next.
You might have seen them on FB, Insta, and Tik Tok or forwarded WhatsApp messages that we are doomed next.
But do these claims hold? Let’s examine the numbers.
How Does A Country Go Bankrupt?
A country’s economy collapses when it has no or zero cash reserve, exports and economic activities.
In Sri Lanka’s case, rampant corruption, economic mismanagement and meddling with the constitution by the ruling elite have led Sri Lanka to bankruptcy, affecting millions of citizens in the island nation.
They are now facing fuel and food shortages, high inflation and endless political turmoil. Sri Lanka is now drowning in its worst-ever economic crisis and pleading for other nations’ help to keep its economy afloat.
Following a 70% drop in foreign exchange reserves since January 2020, Sri Lanka has struggled to pay for essential imports such as food and fuel. Its foreign currency reserves fell to US$2.31 billion in February, a fall of US$779 million from December 2021 through January 2022.
What led to these dire situations was a series of unfortunate events.
Here Are Some YouTube Videos Which Explain The Crisis In Detail:
To summarise the videos, some key factors diagnose the health of a nation’s economy. Let’s have a look.
Foreign Exchange Reserve
Sri Lanka’s Foreign Exchange Reserve
Malaysia’s Foreign Exchange Reserve
Foreign reserves are the foreign currencies a country’s central bank holds as backup funds in an emergency, such as a rapid devaluation of its currency.
It is good practice to hold foreign exchange reserves in a currency that is not directly connected to the country’s currency. Therefore, most reserves are held in U.S. dollars, the most traded currency in the world.
Countries use foreign currency reserves to keep a fixed rate value of their currency, maintain competitively priced exports, remain liquid in case of crisis, pay external debts and provide confidence for investors. Therefore, an increasing foreign exchange reserve is ideal. Malaysia, in comparison to Sri Lanka, has a strong foreign reserve which has been increasing while Sri Lanka’s foreign reserve has been declining.
Balance Of Trade
Sri Lanka’s Balance of Trade
Malaysia’s Balance of Trade
Balance of trade (BOT) is measured as the difference between the value of a country’s exports and the value of a country’s imports for a given period.
A positive trade balance (surplus) is when exports exceed imports, while a negative trade balance (deficit) is when exports are less than imports. A trade surplus does not necessarily indicate a healthy economy, nor does a trade deficit necessarily indicate a weak economy.
While a trade surplus helps in creating employment and economic growth, it may also lead to higher prices and interest rates within an economy. When based solely on trade effects, a trade surplus means high demand for a country’s goods in the global market, which pushes the price of those goods higher and leads to a direct strengthening of the domestic currency. On the other hand, a trade deficit can be beneficial to countries that import heavily and simultaneously invest in economic development.
Malaysia, an export nation, has a consistent trade surplus, while Sri Lanka has had a trade deficit for the past years. Unfortunately, Sri Lanka did not invest heavily in economic development activities.
Malaysia’s Export Category
Sri Lanka’s Export Category
Moreover, Malaysia’s exports are varied, well diversified and highly valued, mainly contributed by the Electric and Electronics industry, Oil and Gas and palm oil. Sri Lanka’s exports, on the other hand, are highly dependent on the low-value clothing and agriculture industry, and their GDP heavily relies on tourism.
Government Debt To GDP
Sri Lanka’s Government Debt to GDP in Percentage
Malaysia’s Government Debt to GDP in Percentage
The debt-to-GDP ratio compares a country’s debt to its gross domestic product (GDP). The ratio indicates a country’s ability to pay back its debts by comparing what it owes with its production.
The higher the debt-to-GDP ratio, the higher its risk of default and the less likely the country will pay back its debt.
Even though Malaysia has gone through a series of economic and financial recession crises before, it has never failed to pay interest and mature debts, proving Malaysia’s reputation and capability as a debtor with a good repayment record.
Article 98 (1) (b) of the Federal Constitution stipulates that the Government must prioritise debt charges over other operating expenses. The External Borrowing Act 1963 provides that offshore borrowings cannot exceed RM35 billion. As of the end -of June 2022, this debt amounted to RM29.4 billion.
The Provisional Measures for Government Financing (Coronavirus Disease 2019 (COVID-19)) (Amendment) Act 2021 stipulates that the statutory limit of Government debt cannot exceed 65% of GDP. At the end of June 2022, statutory debt accounted for 60.4% of GDP.
In addition, 97% of the Federal Government’s total debt is in the Ringgit denomination. This reflects prudent debt management as exposure to foreign exchange risk is minimal.
Is Malaysia Going To Go Bankrupt?
Based on Malaysia’s economy, the big answer is NO.
However, as I explored more about the circumstance which led to the Sri Lanka crisis, I couldn’t help noticing parallels between the political and economic situation in Sri Lanka and Malaysia. The situation in Sri Lanka warns us about where we could be headed if we don’t address similar structural problems in Malaysia.
We can avert the crisis Sri Lanka faces if we are willing to learn the lessons the island nation offers.
The problem in Malaysia is social economics, which is stagnant. To elaborate more on social economics problems, here is the list:
- Lack of proper economic policy and implementation of the policy
- Lack of policies to control fake demand induced inflation, especially in the property market
- Lack of technological innovation and skills appreciation in STEM
- Lack of policies to ensure proper business ethics and transparencies in the business industry
- Lack of law enforcement leading to rampant corruption
- Lack of political stability
Therefore, we, the Rakyat should exercise our rights by electing competent leaders at the next general elections to ensure Malaysia does not go down the path taken by Sri Lanka.
Source: J Advisory