Policy Brief 20, August 2015

Internationalization of Finance and Changing Vulnerabilities in Emerging and Developing Economies:  The Case of Malaysia

Developing countries have become more closely integrated to the unstable international financial system in recent years.  The traditional cross-border financial and trade linkages been deepened;  but also the foreign presence in their domestic credit, bond, equity and property markets has reached unprecedented levels. New channels have thus emerged for the transmission of financial shocks from global boom-bust cycles. Almost all emerging and developing economies are now vulnerable to instability and shocks originating from the global financial system. 

Using this framework which the South Centre established in its earlier Research Paper, this brief briefing paper looks at the case of Malaysia.  The paper assesses the country’s vulnerability to the growing instability in capital flows.  This brief uses the framework developed in that paper to take a closer look at Malaysia to assess its vulnerability to growing instability in international capital flows.  The paper examines the following:  Commodity dependence and vulnerability to trade shocks;  the reduction of the current account surplus;  the steep rise in debt as a driver of recent growth;  fluctuations in capital flows;  adequacy of reserves;  strong foreign presence in bond and equity markets and Conclusions.

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