Monday, September 2, 2013

2012 International Investment Position

I won’t touch too much on the 2Q2013 balance of payments which came out with GDP to weeks ago, but I thought it might be better to concentrate on something more pertinent, and quite a bit easier to understand. For all the potential for the current account to turn negative (with all the attendant consequences), it’s still only one part of a bigger picture that is the international investment position of the country.

The 2012 IIP report came out at the same time as the BOP, and shows a negative position for Malaysia, for the first time since 2007 (RM millions):


Negative here carries a different connotation from the balance of the current account, and more akin to the capital and financial account in the BOP – it means foreigners own more Malaysian assets than Malaysians own assets abroad. And it’s pretty clear what the money went into (RM millions):


Direct investment increased by RM148 billion between 2010 and 2012, but this pales compared with the changes in portfolio ownership of RM260 billion, most of which landed into debt securities (RM millions):


The increase isn’t quite a record for any individual year (2007 holds that distinction), but over a sustained period, this is unprecedented.

On the asset side, Malaysian ownership abroad hasn’t been quite so active, which explains why the overall balance turned negative (RM millions):


Most of the marginal increase in assets here is in direct investment, but ownership of debt securities on the portfolio side is also growing strongly. That makes sense, as the past few years have essentially been a bull market for bonds (low interest rates = low bond yields = high bond prices). Also, apart from a big jump in 2010, international reserves have stayed static.

Now that economies in the advanced world are recovering, the probability of a halt to monetary easing means the party in the bond market is about to end, which should see money flowing out of bonds and more into direct investment and equities (I think), and from emerging markets back to developed markets.

In essence, that’s what’s been happening with many emerging economies lately, hitting both capital markets and currencies. But this rebalancing of investment portfolios is a temporary thing, and I wouldn’t expect it to permanently damage Malaysian markets or economic prospects.

There’s a strange dichotomy going on right now, as economic numbers in the West and even in China are doing better, which suggests an improvement in external conditions which should boost the domestic economy. But markets appear to be heading the opposite direction.

Note that the IIP is a “stock” variable and doesn’t necessarily identify “flows”, as trading profits, dividends, and retained earnings would boost ownership values without any corresponding flows of money. Technically, the BOP statistics should capture this but doesn’t always, due to use of nominee companies and the like. Second, the liability side of the balance sheet is generally more accurate than the asset side, as reporting is likely to be more comprehensive within a domestic context (this applies to everybody, not just Malaysia).

Technical Notes:

Summary of 2012 International Investment Position, from the Department of Statistics


  1. An interesting observation indeed. But i guess it must have also reflected market price changes - i.e. both market prices of the asset as well as exchange rate changes - am i right?

    1. @Lebai,

      Yes, though its rough estimation - the figures tend to be revised every year, as DOS gets better info on holdings.

  2. Morning,

    I was also thinking about the same dichotomy, maybe there is a lag like all the other past recessions??

    Zuo De

    1. Zuo De,

      I don't think we should be thinking in terms of recessions. I think this is more about portfolio rebalancing than anything else i.e. we've been overvalued over the past couple of years, and now reality is setting in.

    2. No no i did not meant Msia will go into recession, what i meant was there is a lag in Msia seeing the positive development in the developed nations....

      Zuo De

    3. Ahh, now I understand. Yes you're right, there would be a lag before the positive effects start turning up here. They're also likely to be concentrated in certain sectors at first (e.g. manufacturing).