1 International Balance Sheets, Global Imbalances and Governance The External Wealth of Malaysia...
-
date post
19-Dec-2015 -
Category
Documents
-
view
214 -
download
0
Transcript of 1 International Balance Sheets, Global Imbalances and Governance The External Wealth of Malaysia...
1
International Balance Sheets, Global Imbalances and Governance
The External Wealth of Malaysia
Andrew Sheng
Preliminary analysis
2
Contents
Introduction
Conclusions
Malaysian Scenario
Global Overview
Regional Perspective
Brief overview of the current trends in global external position
Comparative perspective of regional countries through the crisis and after
A closer look into Malaysia’s external position
Implications for policy imperatives and future directions
for research and surveillance
3
Introduction
4
Introduction
Financial crises, growing external imbalances and financial globalisation have resulted in increasing interest in looking at economies from a balance sheet perspective.
The balance sheet approach focuses on net assets and liabilities (stock) rather than the IMF practice of looking at flow variables.
Recently, IMF’s Lane and Milesi-Ferritti* introduced estimation of external positions for 140 countries from 1970-2004, presenting a valuable set of data previously not consistently available for scrutiny. This is a rich data-set.
* Lane, Philip R., and Gian Maria Milesi-Ferretti 2006, "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004" IMF Working Paper no 06/69, IMF
5
Exciting New Data Source
The balance sheet data, which are derived from flow data and partially stock data, give us an unprecedented total picture of inter-connectivity of stock and flow relationships between trading partners.
In the past, IMF surveillance focused on countries, not on the linkages and transmission mechanisms of trade and capital flow shocks.
The Lane and Milesi-Ferritti* estimates allow a rich analysis of where shocks emanate and how they flow through balance sheets, creating vulnerabilities that authorities were not able to detect before such data.
* Lane, Philip R., and Gian Maria Milesi-Ferretti 2006, "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004" IMF Working Paper no 06/69, IMF
6
Global Overview
7
Major trends in global external positions
Three trends are particularly notable:
1. International financial integration has increased significantly
2. Global imbalances have widened sharply
3. Differences in rates of return between external assets and liabilities lead to significant shifts in international resources
* The analyses presented here are mainly drawn from the Lane and Milesi-Ferretti (2006) dataset.
8
Financial Globalisation Rising
International asset trade increased markedly, especially since mid-1990s. Total foreign assets and liabilities in most countries are much higher than the level of GDP
Source: Lane and Milesi-Ferretti (2006)
0
50
100
150
200
250
300
350
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
United StatesJapanEuropeEast Asia ex-JpnAsian TigersOthers
% of GDPGrowing Financial Integration:
Debt Instruments (assets + liabilities)
9
Financial Globalisation in Equity instruments
This heightened financial integration is true for both developed and developing countries, especially in cross-border equity holdings
Source: Lane and Milesi-Ferretti (2006)
0
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
United States
Japan
Europe
East Asia ex-Jpn
Asian Tigers
Others
% of GDPGrowing Financial Integration:
Equity Instruments (assets + liabilities)
10
Global Imbalances Widening for US & EU
Recent years saw sharp widening of global imbalances
-30
-20
-10
0
10
20
30
40
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
United States
Japan
Asia ex-Japan
Europe
% of group GDPGlobal Perspective: Net External Positions
Source: Lane and Milesi-Ferretti (2006)
11
Asia and OPEC are now net creditorsJapan, emerging Asia and oil producing countries are clear creditors, while the United States saw sharp deterioration in net external position. The rest of the world are essentially net debtors.
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
United States
Japan
Asia ex-Japan
Europe
Australia and Canada
OPEC
Others
USD trillion
Growing Imbalances: Net External Positions
Source: Lane and Milesi-Ferretti (2006)
12
Rate of Return Differentials Matter
Differences in rates of return on assets and liabilities significantly affect net external positions of countries and lead to shifts in resources across borders
Notes:
1. Figures are in real domestic-currency terms
2. Malaysia figures are returns on direct investment only for 2000-2004, due to the lack of publicly available financial account flow data.
Sources: Lane, Philip R., and Gian Maria Milesi-Ferretti, 2005, “A Global Perspective on External Positions" IMF Working Paper no 05/161,
IMF; Author’s Estimates
US ‘superior’ return differential explains its relatively stable net external position despite massive net external borrowings in recent years
Asset Returns Returns on Liabilities Return Differentials
1995-1999 2002-2004 1995-1999 2002-2004 1995-1999 2002-2004
United States 11.8 9.6 10.5 0.9 1.3 8.7
Japan 6.2 2.8 10.1 5.8 -3.9 -3.0
Euro -4.2 -1.0 -3.2
Malaysia -0.1 13.2 -13.4
13
Regional Perspective
14
Onset of the Asian Crisis
Except for Korea, countries affected by the crisis saw significant worsening of net foreign positions prior to the crisis, breaching negative 60% of respective GDPs.
Source: Lane and Milesi-Ferretti (2006)
-140
-120
-100
-80
-60
-40
-20
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Thailand
M alaysia
Indonesia
Philippines
Korea
% GDP
Onset of the Asian Crisis: Net External Positions
15
After the Asian Crisis
After 1998, net foreign positions improved in all crisis countries, but Malaysia made the most progress, putting the country’s external balance sheet virtually at balance.
Source: Lane and Milesi-Ferretti (2006)
-140
-120
-100
-80
-60
-40
-20
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Thailand
M alaysia
Indonesia
Philippines
Korea
% GDP
Onset of the Asian Crisis: Net External Positions
16
A Wider Comparison
Except Korea, the crisis countries clearly have very different net external positions compared to the ‘Asian tigers’
China was relatively unaffected by the crisis, and enjoyed improving net external position due to peg to dollar
Source: Lane and Milesi-Ferretti (2006)
-150
-100
-50
0
50
100
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Th, Ph & In
M alaysia
Sg, HK, Tw & Kor
China
% GDP
Net External Positions: Malaysia and the Rest
17
China: Currency Peg forced Structural Adjustment
China’s GDP powered ahead during and after crisis, while others only recovered to pre-crisis level in the past two years
Source: Lane and Milesi-Ferretti (2006)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
ChinaSingaporeMalaysiaKoreaTh, Ph & In
Number of times of 1990 level
China and the Crisis: Nominal GDP (US$)
18
China: FDI driver of growth & competitiveness
Stock of FDI liabilities relative to GDP have declined for crisis economies since 1998, while FDI to China kept on expanding…
Source: Lane and Milesi-Ferretti (2006)
0.5
1.5
2.5
3.5
4.5
5.5
6.5
7.5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
China
Korea
Th, Ph & In
Malaysia
Number of times of 1990 level
China and the Crisis: FDI Liabilities Stock (% of GDP)
19
Malaysian Scenario
20
Net External Position: Composition
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
ReservesNet debt (portfolio debt + other investments)Net FDI Net portfolio equity
% net external position total = 100
Malaysia's Net External Position: Composition
The profile of foreign asset for Malaysia evolved considerably from 1970 to 2004.
The 1980s witnessed large buildup of debt liabilities.
Source: Lane and Milesi-Ferretti (2006)
21
Net External Position: Composition
The 1990s saw an increase in net portfolio equity liabilities
-100
-80
-60
-40
-20
0
20
40
60
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
ReservesNet debt (portfolio debt + other investments)Net FDI Net portfolio equity
% of GDP Malaysia's Net External Position: Composition
Source: Lane and Milesi-Ferretti (2006)
22
Net External Position: Composition
After the crisis, Malaysia saw buildup in foreign reserves and overall improvement of net external position
-80
-60
-40
-20
0
20
40
60
80
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
Net portfolio equityNet FDI Net debt (portfolio debt + other investments)Reserves
% GDP Net External Position: Composition
Source: Lane and Milesi-Ferretti (2006)
23
Net External Position: Composition
Portfolio equity2% FDI
19%
Portfolio debt + Others
28%
Foreign reserves51%
Foreign Assets
Composition of Malaysia's Net Foreign Assets, 2004
Portfolio equity20%
FDI40%
Portfolio debt + Others
40%
Foreign Liabilities
Source: Lane and Milesi-Ferretti (2006)
24
External Wealth and the Economy: Some Observations
Income
Total foreign assets and liabilities (% of GDP), especially the former, have grown in line with income. This suggests a positive relationship between level of income and the holding of foreign assets
0
2
4
6
8
10
12
14
16
18
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
0
20
40
60
80
100
120
140
GNP per capita (LHS)
Total Foreign Asset
Total Foreign Liabilities
RM ('000) % of GDPIncome versus Foreign Assets and Liabilities
Sources: Lane and Milesi-Ferretti (2006); Department of Statistics, Malaysia
25
Vulnerabilities
Both cases of crises (1985, 1997) were preceded by bouts of worsening net external position, both breaching negative 50% of GDP
-80
-70
-60
-50
-40
-30
-20
-10
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
-12
-8
-4
0
4
8
12
Net External Position (% of GDP)
GDP Growth (LHS)
% %Net External Position and Real GDP Growth
If NEP worsens to -50% of GDP, crisis looms
Sources: Lane and Milesi-Ferretti (2006); Department of Statistics, Malaysia
26
Net external position shows a negative correlation with REER, pointing to a probable link between exchange rate policy and the improvement in external position after the crisis
Real Effective Exchange Rate & NEP
Sources: Lane and Milesi-Ferretti (2006); Bank for International Settlement; Author’s estimates
80
90
100
110
120
130
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-30
-20
-10
0
10
20
30
REER (LHS)
Change in Net External Position
Index (2000=100) % GDP
Correlation: -0.61
80
90
100
110
120
130
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-80
-60
-40
-20
0
REER (LHS)
Net External Position
Index (2000=100) % GDP
Correlation: -0.65
Net External Position and Real Effective Exchange Rate
27
Investment
Capital formation, particularly public investment, showed very significant positive relationship with foreign debt and FDI liabilities
The relationship was clearest in late 1980s up to 1998, in which up to 90% of variations in investment can be explained by changes in foreign debt liabilities
Public Investment associated with Debt + FDI growth
Note: Calculated as correlation between rate of change of respective nominal variables, investment variables lagged 2 years.
Sources: Lane and Milesi-Ferretti (2006); DOSM; Author’s estimates
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
total investment
public investment
Total FDI + Debt Liabilities versus Gross Fixed Capital Formation
Correlation Coefficient (rolling 10-year window)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
total investment
public investment
Total Debt Liabilities versus Gross Fixed Capital Formation Correlation Coefficient (rolling 10-year window)
28
0
5
10
15
20
25
30
35
1980 1984 1988 1992 1996 2000 2004
0
200
400
600
800
1000
1200
1400
PEL (LHS)
KLSE CI
% of GDP index
Correlation: 0.94
0
5
10
15
20
25
30
35
1980 1984 1988 1992 1996 2000 2004
0
50
100
150
200
250
300
PEL (LHS)
KLSE Market Cap
% of GDP % of GDP
Correlation: 0.87
0
5
10
15
20
25
30
35
1980 1984 1988 1992 1996 2000 2004
0
100
200
300
400
500
PEL (LHS)KLSE Turnover
% of GDP RM million
Correlation: 0.90
Foreign Portfolio Equity Liabilities (PEL) and the Stock Market
Share Market
Foreign portfolio equity liabilities are very significantly correlated to share market movements
The high level of share market activities for the period 1992 to 1998 was clearly related to the steep inflow in portfolio equities
Foreign Portfolio Flows drive Equity Market
Sources: Lane and Milesi-Ferretti (2006); KLSE; Author’s estimates
29
The difference between net external position and cumulated current account provides an estimate of the valuation component* of net external assets, which represents:
• cumulated value of net capital gains; and
• exchange rate adjustments
Further Analysis: Valuation Effect
Sources: Lane and Milesi-Ferretti (2006); DOSM; Author’s estimates
* Estimate using methodology presented in Gourinchas, Pierre-Olivier, and Helene Rey, 2005, “From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege,” NBER Working Papers 11563, National Bureau of Economic Research
-80
-60
-40
-20
0
20
40
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
Net External Position
Cumulated Current Account
% of GDP
30
Two clear stylised patterns are notable:
• Valuation effect has been persistently negative suggesting large net capital losses, especially during period when foreign liabilities was large*
• Depreciation of ringgit corresponded to worsening valuation effect, as shown in the shaded areas
Persistent Negative Valuation Effect
Sources: Lane and Milesi-Ferretti (2006); BNM; Author’s estimates
* Given the conceptual relationship, this can potentially explain the large return differential between foreign assets and liabilities
-40
-35
-30
-25
-20
-15
-10
-5
0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
0.25
0.30
0.35
0.40
0.45
0.50
Net Valuation Component
Exchange Rate (RHS)
% of GDP USD/RM
31
Preliminary Conclusions
32
Implications of Analysis
• Malaysia clearly in much better shape and less vulnerable to external flow shocks - fiscal retrenchment has worked
• Malaysia is not short of savings and therefore improvement of domestic financial intermediation would cushion Malaysia against external shocks
• Letting excessive savings flow out, while deepening domestic intermediation clearly reduces overall risks (equity return swap).
• We need NATIONAL RISK MANAGEMENT strategy and policy. The way we finance development and growth exposes us to different risks. When we are net debtor (negative NEP), we are exposed to shocks on our debt. When we are net creditors, we must learn how to manage our return on assets.
33
Implications on Policy
• Policy Management for rich country (net creditor) very different from poor country (net borrower).
• Example: If net assets are held in USD and liabilities are in Yen, then Malaysia would be in double squeeze, a declining asset and appreciating liability.
• This is true not only of Public Sector Risk Management, but also for Private Sector.
• This makes the case for faster development of Asian financial markets, so that we can invest in countries and currencies that appreciate together relative to USD/Euro, rather than being depreciated on our asset holdings.
34
Direction of Research
Increase in international financial integration increases exposure to external financial shocks, meaning that balance sheet vulnerabilities will need to be closely monitored.
Thus, research initiatives should be directed to improve the understanding of the economy through the balance sheet perspective.
The devil is in the details. We need to study more carefully not just the components of our balance sheet and flows, but also the inter-relationship with other economies.
35
A Macro-Micro Prudential Framework
Surveillance should be reemphasised to include the balance sheet approach to complement the existing surveillance effort. Macro-behaviour have micro-origins, and micro-behaviour have macro-implications
Comprehensive surveillance would require detailed understanding of balance sheet conditions of all the different sectors of the economy, from the financial sector to the public sector and so on.
* Mathisen, J. and Anthony Pellechio, 2006, “Using the Balance Sheet Approach in Surveillance: Framework, Data Sources, and Data Availability" IMF Working Paper no 06/100, IMF, provides an excellent starting point for the understanding of the balance sheet surveillance approach.
This means that different departments within the central bank [and with other regulators] need to have greater co-operation and information sharing in order to have a holistic view of potential shocks to the financial system.
36
Growth, Stability and Governance
Economic Growth can only occur in environment of political and financial stability. Central Bank is in charge of monetary stability and systemic financial stability.
Central Bank challenges are very different from emerging market to middle income market to developed economy.
As markets get more sophisticated, regulation and oversight of systemic stability becomes much more complicated. This is because we are in global competition and local regulation.
You have to help locals compete globally, but you have much greater difficulty regulating large foreign giants, some of which may be much larger than the whole economy.
37
Learning to trust Market, but carry big stick
In order to regulate market, you have to learn to think how the market thinks. Hence, there must be greater inter-change of staff between the regulators and the regulatees.
Example: how do we regulate Hedge Funds who now account for 50%+ of turnover in London and New York?
You have to learn how they operate and use the language they understand in order to influence their behaviour. Example: Fraga handling Brazilian crisis.
WTO rules require regulators to use International standards to regulate financial markets. This means that we must use the Big Regulators to regulate Big Financial Groups.
In order to compete regionally and globally, we must learn to both cooperate and compete with the Big Financial Groups.
38
Thank YouQuestions to [email protected]