External debt and economic growth in Malaysia

• Main Author: Siti Fazilah Alwi
• Format: Thesis
• Language: English; English
• Published: 2020
• Subjects: HJ8101-8899 By region or country
• Online Access: https://eprints.ums.edu.my/id/eprint/40675/1/24%20PAGES.pdf; https://eprints.ums.edu.my/id/eprint/40675/2/FULLTEXT.pdf; https://eprints.ums.edu.my/id/eprint/40675/
• Institution: Universiti Malaysia Sabah

The purpose of external debt is to finance domestic economic development. However, poor policies and the shock of financial crisis can cause increased external debt levels. This is a source of concern for the Malaysia’s government, policymakers, and academicians particularly in determining whether or not the country will be trapped in a debt overhang situation as the insufficiency of domestic economic resources makes external debt become one of the important source of domestic capital. Previous research works investigating the relationship between external debt and economic growth in Malaysia have reported inconsistent results. Therefore, this study conducted an empirical analysis to determine the long-run and short-run linkage between external debt and economic growth in Malaysia. Despite the intense debate on the link between external debt and economic growth, no research that has taken into account the new definition of external debt. To address this issue, this study examines the effects of external debt on economic growth by taking into consideration the new definition of external debt, especially in terms of non-residents’ holding of local-currency denominated debt securities. Furthermore, this study also aims to explore the changes in economic growth through external debt and other variables over particular time periods. Using a time-series econometric approach, and Malaysia’s quarterly data from 1997 to 2016, this study found that there exists a significant positive linkage between external debt and economic growth in the shortrun. The results of the Granger causality test demonstrate the existence of shortterm bilateral causal connections between external debt and economic growth, in the context of Malaysia. At present, external debt drags down economic growth during economic recession. Hence, the excessive debt will result in economic downturn in the long term. The findings of this study also reveal that a large portion of nonresidents’ holding of local-currency denominated debt securities will hinder economic growth through external debt due to the uncertainty of external risk. This uncertainty may further discourage investments, and hence contribute negatively to economic growth, nevertheless to achieve sustainable economic growth with increased external debt levels. Therefore, a country should pay particular attention towards managing its external debt.