How is Malaysia handling the global liquidity?

This week, The Edge analyses the impact of the shift in fund flows and the imbalances of the global economy on Malaysia and Malaysians.

The aggressive policy measures by the US, Europe and Japan has resulted in massive liquidity finding its way to the emerging markets in search for better returns as the bond yields in US and Europe declined sharply.

Emerging markets have attracted foreign capital due to its higher yields, stronger economic growth and as such, better appreciation prospects for a wide range of asset classes.  Like other emerging markets, Malaysia has enjoyed the benefits of these foreign fund inflows which boosted the prices of local assets including stocks, properties, bonds and the Ringgit.

This is however, not without cost. Bank Negara Malaysia’s balance sheet has expanded substantially with the rising cost of sterilization. Keeping interest rates artificially low has resulted in negative real interest rates. This encourages consumption and discourages savings which in the longer term can weaken the Country’s current account. It also creates asset bubbles. 

Read the full article in The Edge this week.

Next week, we will discuss how this party can end and what the consequences are to the stock market, bond market, property market and the Ringgit.