SINGAPORE (REUTERS) - Tumbling oil prices are putting pressure on Malaysia's commodity-driven economy, not merely by hurting its exports and currency but more so by putting an unwelcome spotlight on the huge debts that the country runs.
Malaysia, a major exporter of liquefied natural gas and oil, is suddenly faced with the risk that the cheapness of oil and other commodities will drive the current account into a deficit.
That would be the fourth red light blinking on the dashboard of an economy running on debt on all fronts: government, households and the capital account.
The possibility has unnerved foreign investors who have US$45 billion (S$60.15 billion) parked in the country's bonds and have lent a total of US$208 billion to the high-yielding South-east Asian country.
The current account surplus narrowed by almost a third to RM7.6 billion (S$2.81 billion) between the first and third quarter of 2014, and the prospects of a fiscal deficit are looming as oil and gas export earnings fall.
Malaysia already is a net importer of foreign capital.
Its households are bursting at the seams with debt.
And the government, which until recently could always count on generous oil revenues to fund pet projects, has borrowings that amount to 53 per cent of economic output, almost equalling Asian giants India and China.
Digging a little deeper, it is easy to understand why credit markets now rank Malaysia the riskiest in South-east Asia and why the ringgit has plunged to a six-year lows.
"Malaysia was a net lender to the world until 2012, but it has gone the opposite way since 2013," said Mr Mirza Baig, head of Asian rates and currency strategy at BNP Paribas in Singapore. "When they are in that kind of a position, then any kind of a catalyst that comes along can expose them to market volatility."
"Now they have less reserves, still very high amounts of debt and the possibility of a current account deficit. That is where the tipping point lies."
In a worst case scenario, the ringgit would come under increasing pressure should oil prices remain low for long enough to tip the current account into deficit.
Foreign investors, which own 44 per cent of the bond market, would run for the exit.
Next at risk would be the US$102 billion of short-term borrowings Malaysia has to pay back to the world, barely covered by the US$116 billion of foreign exchange reserves held at the end of 2014.
A vicious cycle could ensue as foreign capital outflows would force the central bank to spend more reserves. Bond yields and the cost of money would rise, and banks would resort to recalling or writing off loans as they struggle for funding.
Malaysia's Prime Minister Najib Razak, who is also the finance minister, said on Tuesday there was no impending crisis, but his concern over the current account was evident, even as he cut the government forecast for growth this year. "The current account, God willing, will remain positive, and won't be in deficit," Najib said.
Central bank governor Zeti Akhtar Aziz pointed to a slight drop in government debt since 2013 and to the well-capitalised banks as buffers for the economy, while also noting that capital controls of the sort the country had used in 1998 during the Asian crisis were off the table.
"Malaysia has moved on from the reliance on controls to manage capital flows," Dr Zeti told Reuters in emailed comments late last week.
Bank Negara successfully defended the ringgit in 2013, when foreign money fled emerging markets as fears of a tightening in US policy hit sentiment. It also dealt with similar bouts of volatility last year.
But, ultimately, that defence has backfired, as the stability during that period led Malaysia to take on more debt, with investors and borrowers perceiving it as a reliable, oil-rich economy.
The change in fortune now has resulted in the ringgit falling more than 10 per cent in the past 4 months, and foreign currency reserves dropping US$25 billion since 2013.
Today, Malaysia has net external debt of RM47 billion (S$17.3 billion), whereas it had net external investment of RM106 billion in 2009.
Judging by the climb in ringgit interbank rates and how aggressively analysts are cutting estimates for economic growth, investors appear to foresee stress in Malaysian markets.
"Once investors think that banks may have a liquidity problem, then things happen very quickly because the markets and investors push the buttons in very, very short order," said Mr Baig.