Could Grexit Affect Us?

A Kadir Jasin

UPDATE, July 1 – Congratulations to the Government of Malaysia for the Fitch upgrading of Malaysian Government debt from “negative” to “stable” and condolences to Malaysian consumers for having to pay 10 sen more for RON 95 and 20 sen more for RON 97. CNBC reported that Crude futures hit three-week lows on Monday.

ORIGINAL POST

 

EVEN during this “barakah” month of Ramadhan, we appear not to be blessed. The Muslim believes that Ramadhan is a blessed month.

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We are still grappling with old issues – the likes of 1MDB, the FGV, the PPFI, the SRCI, low commodity prices and the outflow of funds  – all of which have been dampening the economy and dragging down the ringgit.

And the pump price of RON 95 had just gone up another 10 sen to RM2.15 per litre and RON 97 up by 20 sen to RM2.55. Diesels unchanged at 2.05. This cannot be a blessing!

We all know about debt-ridden 1MDB, the decimation of FGV share prices and the attempt to use Tabung Haji to give a life line to 1MDB. By the way has Abdul Azeez Abdul Rahim being able to sell his TRX land at a profit as he had promised months ago? He then said buyers were lining up to buy.


More recently we are made aware of PPFI’s RM26.6 billion borrowing from EFP and SRCI’s RM4 billion borrowing from KWAP. Both are nursing their
debts.

The external factors are also acting against us. And as if these are not enough of these, Greece has to default on its external debts and, will most likely, exit the Euro.

What is Greece to us? Literally nothing. But believe it or not we are likely to be most badly affected among the Asian countries by its bankruptcy.

Greek lining up to withdraw the Euro as their economy collapses

I am struck by a June 29 report in Barron’s Asia, an American-owned investment magazine and website, which says Malaysia is likely to be the most affected by the Greek event. It quoted Nomura Securities.

Why is it so?

Because, besides Hong Kong and Singapore, Malaysia has the largest exposure to European bank claims. This could happen if European banks cut back their Asian debt holdings to repair their balance sheets caused by Greek exit (Grexit) from the Euro Zone.

The Barron’s report says, as of the end of last year, European banks’ debt claims in Malaysia, is equivalent to 17.7% of our GDP. The runner-up is Korea with only 8.7% of its GDP.

In addition, the report says, money has been leaving Malaysia this year even without the Grexit. Malaysia’s financing gap, defined as current account minus portfolio outflows (in equity and bond) runs a good 4.1% of its foreign exchange reserve.

The report notes: “Greece, a small economy that is less than 2% of Euro area’s GDP, can’t possibly be a major trading partner for Asian markets. But it could affect Asia disproportionately if European banks cut back their debt holdings in Asia to repair their balance sheets from the Grexit.”

Indonesia will be vulnerable too. Indonesia’s financing gap is at 3.9% of its GDP. By comparison, India is a lot safer. Its foreign exchange reserve is three times the size of Indonesia’s and its financing gap is at only 2.9%, according to Nomura.

On the same day, the ringgit fell to a 10-year low in intra-day trading due to worsening situation in Greece and as investors weighed whether Fitch Ratings would downgrade Malaysia.

The stock exchanges reacted similarly. On June 29, the FTSE Bursa Malaysia KL Index fell 0.4% and the Indonesia JSX Index dipped 0.8%. Month-to-date, the iShares MSCI Malaysia ETF fell 4.8%, the iShares MSCI Indonesia ETF dropped 7.8%.

So while the arrest of the former PetroSaudi International (PSI) executive, Xavier Andre Justo (XAJ) by the Thai police might have caused elation among the Umno elite, it does nothing to shore up the confidence in our economy. Some say it’s a put on – a ruse to throw us off the 1MDB track.

Wallahuaklam.