By Ernest Cheong
KUALA LUMPUR — In a Reuters report released on Jan 21, 2015 entitled Red lights blinking on Malaysia, it was reported that falling oil prices have driven Malaysia’s current account into a deficit and forced the Government to review its 2015 Budget tabled in 2014.
According to Reuters, there are now four “red lights blinking on Malaysia” including government, household, capital account and current account debts.
Deutsche Bank, in their special report on Asia’s 2015 macro outlook predicts the Malaysian Ringgit will fall to the 2008 crisis level of RM3.73 against the US Dollar, as it believes that Malaysia’s “worrying profile of indebtedness” will act as the currency’s Achilles heel in 2015.
Deutsche Bank further stated that “Malaysia stands out as the weakest link in the region, boxed in on four metrics of indebtedness: the External Debt metrics are worrying, the Fiscal Debt is likely to overshoot, Household Debt is of concern and the Current Account is at risk of dipping into deficit”.
CNN, in a report dated Jan 22, 2015, warned that “Investors are taking an increasingly critical view of the Malaysian economy amid fears that the major oil-exporting country might start running current-account and fiscal deficits at the same time due to the recent plunge in oil prices”.
CNN also reported: “The country is running a deficit, and the outstanding balance of government debt is equivalent to around 55 per cent of GDP, the highest among Southeast Asian nations”.
With these four alarms alerted in various forms by Reuters, Deutsche Bank and CNN, will Malaysia be heading towards an economic recession as severe as that experienced during the 1997/1998 Asian Financial Crisis?
All the three reports agree that in 2015 Malaysia has serious debt problems on all four metrics of indebtedness as listed above.
At this point nobody knows for certain if we will return to the 1997/1998 crisis level. Recent economic indications including the Reuters, Deutsche Bank and CNN reports point towards a recession that is severe or more severe than 1997/1998.
In order to gain an insight into how painful it would be when the 2015 economic crisis is “full blown”, I will attempt to trace the course of events before the outbreak of the 1997/1998 crisis through to the 2008 financial and banking crisis leading to the looming 2015 economic crisis vis-à-vis Malaysia.
THE 1997/1998 ASIAN FINANCIAL CRISIS
The 1997 Crisis, also called the “Asian Contagion” began in May 1997 when Thailand triggered the failure of global currency markets after its government decided to no longer peg the Thai Baht to the US Dollar. Currency declines spread rapidly throughout Asia which in turn caused stock prices throughout Asia to fall. Import revenues of affected countries dropped and even caused political upheavals in some of the Asian countries.
Malaysia was not spared the consequences of the crisis. Non-performing loans (NPLs) rose as more borrowers could not service property loans. In January 1998 the Malaysian Government set up the National Economic Advisory Council (NEAC) to revive the economy and Danamodal Nasional Bhd was set up to recapitalise Malaysian banks.
At the end of 1999 property-related loans accounted for almost one third of total NPLs in Danaharta’s portfolio. Danaharta purchased RM16.2 billion worth of property-related NPLs from the banks thus sparing them the crippling effects of holding these debts. Danamodal provided capital injections into the Malaysian banking system that enabled the banks to start lending to potential property purchasers that in turn helped to turn the depressed property market around.
THE EFFECTS AND CONSEQUENCES
The effects of 1997/1998 Crisis on the Malaysian property market were serious and damaging where both transactions and values dropped drastically.
After the outbreak of the crisis, property price levels dropped from their 1997 levels as evidenced in the corresponding losses in six middle class suburbs as shown in Table 1.
THE 2008 FINANCIAL CRISIS
The 2008 Financial Crisis also called the “Global Financial Crisis” was considered by many economists to have been the worst financial crisis since the great depression of the 1930s. The Global Financial Crisis threatened the total collapse of large financial institutions. The bailout of banks by national governments prevented a collapse of the global financial system. In Iceland, Ireland, Spain, Portugal and Greece, housing markets suffered with many bank foreclosures that resulted in prolonged unemployment.
The 2008 Financial Crisis contributed to the failure of key businesses and the decline of consumer wealth was estimated at trillions of US dollars. The beginning of the 2008 Financial Crisis can be traced to August 2007 when BNP Paribas, a French bank, terminated withdrawals from three hedge funds citing a “complete evaporation of liquidity”. Many US banking and insurance giants including Bear Stearns, Lehman Brothers, Merrill Lynch and American International Group Inc, to name a few, did not survive the 2008 Financial Crisis. They were either bailed out or taken over by another bank. Some, like Lehman Brothers, collapsed and were wound up.
The bursting of the housing bubble in the United States that peaked in 2006 caused the values of securities tied to US property values to plummet thereby damaging financial institutions globally. The 2008 Financial Crisis was credited with causing global economic activities to decline leading to the 2008 – 2012 Global Economic Recession that contributed to the European Sovereign Debt Crisis, from which many southern European countries have not yet recovered.
THE 2008 FINANCIAL CRISIS WORSE THAN THE GREAT DEPRESSION
At the height of the 2008 Financial Crisis, Ben Bernanke, the then chairman of the US Federal Reserve Bank was quoted as making the statement in a document filed on Aug 22, 2008 with the US Court of Federal Claims as part of a lawsuit linked to the 2008 US Government bailout of insurance giant American International Group Inc as follows: “September and October of 2008 was the worst financial crisis in global history, including the Great Depression. Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
The 1930s Great Depression caused much damage in the United States that include:
i) 13 million people unemployed
ii) Industrial production dropped by 45% between 1929 and 1932
iii) Construction of houses fell by 80% between 1929 and 1932
iv) 5,000 US banks were closed from 1929 to 1932
PROJECTED FALL IN PROPERTY PRICES IN 2015
There are signs property prices in Kuala Lumpur have begun to drop. If what happened to property prices during the 1997/1998 Crisis is relied upon as a guide, by end 2015 or early 2016, we can expect to see property prices in the Klang Valley falling by 30% of their peak 2012/2013 prices.
We shall now project the likely property price levels at end 2015 and the corresponding losses in six middle class suburbs as shown in Table 2.
Comparative losses between 1998 and 2015.
We shall now compare and contrast the losses suffered by property owners in 1998 and losses projected to be suffered by property owners in 2015 in the six middle-class suburbs as shown in Table 3.
ARE WE HEADING TOWARDS THE 1997/1998 SCENARIO?
We are already witnessing a recurrence of the 1997/1998 Crisis now. How severe it will be in 2015 is difficult to predict at the moment.
The reality of a 2015 property crash is already upon us. How every individual and every family responds to this reality will determine whether or not they will survive the crash.