Malaysia and the Perfect Storm

Let’s say that you’re a pessimist about global growth prospects. If so, you’re not alone: Q2 GDP growth in the U.S. is weak, the U.K. is in a double-dip recession, and there’s no end to the Eurozone crisis in sight. Growth in China is softening too, and the rest of the BRICs aren’t registering the growth that we have come to expect over the past five years. If you also think that global financial markets remain fragile, then you’d be right to worry about a perfect storm in the global economy.
This is bad news all around for the big economies. But we should also pay attention to how global economic conditions will affect small open economies. By definition, these are economies that are dependent on trade and investment, and which therefore have harnessed themselves to the global economy as a basic engine for growth and development. This gives them access to markets for their exports and to investment, but by the same token, it makes them vulnerable to whatever ups and downs the global economy experiences.
Malaysia is a classic example of a small open economy. And a new report (unfortunately behind a paywall) from Roubini Global Economics argues that Malaysia is not only the Asian country whose economy is most vulnerable to a perfect storm, but also the country which is perhaps least able to do anything about it. Take note of the following:

• Malaysia’s bank claims to the U.S. or the Eurozone are almost 30% of GDP (highest in Asia)
• Malaysia’s exports to China, the Eurozone, and the U.S. are over 20% of  GDP (2nd highest in Asia)
• Malaysia has room for monetary easing, but deficits are already pretty high—and there’s an election coming too, meaning that we can expect that the government is already primed to spend

Take all of this together, and we have cause to worry about Malaysia’s economy over the next year. This may have political consequences too. I have recently argued that in 2008-10, emerging economies like Malaysia were able to escape the worst of the political turmoil that frequently accompanies global economic crises because they were able to explain to their citizens that their own economic troubles were not their own fault. Lula put it best: “this is a crisis that was caused by white people with blue eyes.” I don’t think that this will continue to work, in Malaysia or anywhere else.