MARCH 12 ― You may have noticed the media reporting yesterday a tripling in Malaysia's external debt. For example:

“Malaysia's external debts grew by more than three-fold in less than a year, from RM196 billion at the end of 2013 to a whopping RM740.7 billion in the third quarter of last year.”

The increase in the 2014 debt figure is due to a redefinition of debt by the Ministry of Finance and Bank Negara in January 2014.

MOF and BNM basically decided to adopt reporting conventions that the IMF, World Bank, UN and others have recommended for over a decade (since at least 2003).

The differences between the old and new definitions are summarised here in the table clipped from the BNM report (attached):

The new definition primarily includes foreign holdings of ringgit-denominated securities and bonds.

It is actually a prudent measure on MOF/BNM's part to track this, and quite overdue given the growth of Malaysia's bond market since the 1990s.

Institut Rakyat's press statement on Monday pointed out the need to ensure that our international reserves remain sufficient to cover our external debt payments for a forward period of 12 months.

Holding this amount is generally accepted as a buffer against sudden outflows of capital, as per the 1997 Asian Financial Crisis. Most developing countries have stockpiled excess international reserves since that time.

Recently, we experienced outflows in late 2014 as the US Federal Reserve raised interest rates. We may see another such outflow in June 2015 if it raises rates again.

Our external debt repayment will be sound as long as the ratio of international reserves to 12 months of external debt remains above 0.9:1.

We are currently at a reserves-to-debt-ratio of 1.1:1, having fallen from a high of 2:1 after the 2008 crisis.

Care must also be taken in looking at the pre-2014 figures for this ratio as it was previously reported using the older and much lower definition of external debt, thus leading to an inflated figure.

Based on the redefinition of external debt, the 2013 to 2014 picture looks like this:

Thus, we can see that Malaysia's external debt (redefined) only increased 7% from RM697 billion to RM745 billion between 4Q2013 and 4Q2014.

*This is the view of the individual or organisation and is not necessarily the opinion of Malay Mail Online.