Wow. Malaysian Prime Minister Talks and Denies a Crisis!

Who says Malaysia is in a crisis (or could be heading for one) anyway as to warrant the attention of Malaysia’s PM to publicly address the issue?

Writes the Nikkei Asian Review: (bold mine)

In a live television address on Tuesday, Prime Minister Najib Razak said Malaysia is "not in crisis" but needs "proactive measures" to counter the changing economic environment that has caused the ringgit to fall 12% against the US dollar in six months and fuelled a foreign capital flight on the stock market.

Last week, foreign investors sold 1.42 billion ringgit in equities, the "highest level since August 2013", according to brokerage MIDF Equity Research.

Razak's government responded on Tuesday by announcing it will trim 5.5 billion ringgit ($1.5 billion) from the 273.9 billion budget allocated for 2015.

The belt-tightening measures include reducing grants to state-owned companies worth 3.2 billion ringgit, and cuts of 1.6 billion on overseas travel and other government expenses.

What has PM Razak been reacting to?

Has it been due to the domestic currency, the ringgit? The USD-Ringgit currently trades at 2008 levels!

Or has been due to this?

Malaysia’s equity markets as measured by the FMBKLCI have been under pressure. As of Friday’s close, the formerly hot KLCI has been down 1% year to date. In 2014 the KLCE was down by 5.6%

Or this?

The cost to insure government debt via Credit Default Swaps, based Deutsche Bank’s calculations, has been spiking for Malaysia, Thailand and the Philippines (left window). But to a lesser degree Indonesia (right window).

Or a combination of the above?

Media refers to the stock markets, but definitely it has not just been stocks.

Something 'wrong' has been brewing in Malaysia’s political economy, for incipient signs of capital flight to surface. As shown above, such has been presently ventilated on her financial markets.  

Late last year, even the BBC highlighted on Malaysia's Savings Retirement Crisis, as I posted here. 

So it appears that Malaysia's woes have also been generating wider mainstream recognition.

In response, Malaysia's PM goes to public to deny the existence of a crisis.

Well, "denials" signify a symptom of any crisis in progression.

In a working paper comparing the Asian Crisis with the European Crisis, Edwin Truman of the Peterson for Institute for International Economics wrote about the transition of the stages of financial crisis which underpinned both the 1997 Asian crisis and the recent European crisis (bold and italics mine) 

Financial crises with significant international ramifications are generally preceded by credit booms. The booms turn into busts with severe negative consequences for the real economy. During the boom period, irrational exuberance takes hold. Policymakers and domestic and foreign investors, as a group, inevitably believe that this time is different. All countries are different in their precise circumstances, but certain regularities are evident. Various indicators give warnings of crisis (as well as false positives), but when a crisis occurs, most policymakers and many market participants are surprised and unprepared. For policy-makers, the surprise tends to manifest itself in denial that there is a crisis until the evidence is irrefutable.

For market participants—domestic as well as foreign—the response is a rush to exit from investments and markets in the country and, often, exit from countries perceived to be in similar circumstances…

Additionally…

All crises involve surprise, denial, and delay essentially by definition. If markets and outside authorities were not surprised, they would have sounded an alarm and, one would hope, the country’s policymakers would have taken some preventative action. Of course, some voices can always be identified ex post that issue warnings of crises, but in general they are soft voices and, again by definition, are largely ignored. 

In short, even the mainstream now recognizes that the seminal phase towards a transition to a crisis has always been "denial" by the establishment.

Yet announced reforms by the PM will be good (if implemented), but will it be enough to offset imbalances accumulated from the previous credit boom? 

Now that Malaysian's housing bubble has been slowing, how will this affect credit quality and credit risks of domestic institutions?

Déjà vu 1997?