Will Foreign Investors Come Back?

Will Foreign Investors Come Back?
8 Sept, 2008

According to Bank Negara's latest statistics, some US$1.1bn (about RM3.8bn) of foreign funds exited from the country during the period Aug 15-29.

By LIANG FENGYING, Business Desk/Translated by DOMINIC LOH/Sin Chew Daily

The Malaysian equity and bond markets have been performing very badly after the tabling of the 2009 Budget in the Parliament, while the already weak ringgit continues its downward trend.

What does that show? Obviously foreign investors are not too bullish about the country's outlook, and are withdrawing en masse from the local markets.

Bursa Malaysia, which has been going through a tough time over the past few months, was buoyed by last Friday's tabling of 2009 Budget, with the benchmark index jumping by about 30 points (also owing to a stronger overnight US market). But thanks to a string of both domestic as well as external factors, the market has been falling over the following few sessions, with the key index retreating to 1,070 points on Friday's close, a sizeable discount from the pre-election level of about 1,300.

What has further confounded the market is the turbulence in Malaysia's bond market, long hailed as a "safe haven for investors," showing that investors are indeed pulling out from the bond market as well.

The bond market has no doubt been gloomed by the mounting inflationary pressure, which has strengthened the market's anticipation of higher interest rates, thus lifting bond return rates while suppressing bond prices. Although the expectations for higher interest rates have somewhat weakened now, which should be working to the bond market's favour, it is yet to be seen whether foreign investors will eventually be lured back to our shores.

The recent exodus of foreign funds from Malaysia could be attributed to a number of factors.

According to Bank Negara's latest statistics, some US$1.1bn (about RM3.8bn) of foreign funds exited from the country during the period Aug 15-29.

The exodus of foreign funds have plagued the weakening ringgit. Besides, a stronger greenback has also contributed to the departure of foreign funds.

Since the dollar began its upward trend in late July, the ringgit has been steadily on the slide. With the local currency going downhill, coupled with the lacklustre performances of the local markets, it is natural for profit-minded foreign investors to move their money elsewhere.

The ringgit has depreciated by about 6% since late July, from RM3.25 to RM3.45 to the dollar, with short-term prospects less than optimistic.

The highly unpredictable domestic politics and sluggish growth have gloomed the outlook of local markets among foreign investors, while the central bank's decision not to increase the interest rates in late July has further consolidated their determination to withdraw from the country.

In the 2009 Budget, the government has brought some good news to the people plagued by escalating prices, including the provision of subsidies on essential items and generous allocations for infrastructure projects. But on the other hand, the increased expenditure has also perked up the budget deficit from 3.2% of GDP in 2007 to 4.8% this year, much higher than the 3.1% target initially set.

The expanding budget deficit has frightened foreign investors, and this is reflected in the lower sovereign bond ratings, which will make the cost of raising funds overseas higher.

Just as the entire world is finding ways to survive in an environment of sluggish growth and high inflation rates, it will be an uphill task for Malaysia to attract more foreign input. As if that is not enough, some of the not so investment-friendly rulings provided in the 2009 Budget have further dented the country's attractiveness to foreign investors.

Some of the new rulings in the Budget, such as stricter disbursement of reinvestment subsidies, will dampen the sentiment of companies keen to reinvest, while affecting foreign investors here. No doubt, this serves as a dampener to the already depressed investment sentiment.

Another new ruling in the 2009 Budget states that incomes of all foreigners and foreign investors are subjected to 10% pre-deduction taxes, part of the government's effort to increase its tax revenue.

With the external environment continuing to be bearish, and the outlook of political situation here gloomy, foreign investors are expected to quicken their pace of pulling out.

Will foreign investors come back? Well, this to a large extent will depend on whether domestic and external economic environments will improve; but more importantly, changes in the country's political scenario.