This paper conducts an empirical probe on the Malaysia ‘s external debt sustainability place. In add-on, this paper aims to supply an in-depth analysis on Malaysia external debt place. The estimations prove that there is strong grounds of external sustainability for Malaysia external debt place. However, the empirical consequences besides reveal that the accretion of external debt is associated with a lag in the economic growing. Besides this, we find grounds that debt service ratio does non crowd-out the Malaysia investing rate. In other words, even though the external debt is negatively associated with economic growing, Malaysia is found to be safe from being in the debt overhang hypothesis. However, the negative consequence could be interpreted as the chief symptom of a state before it falls into the debt overhang job.

Keywords: Sustainability ; External Debt ; Economic Growth and Malaysia

## Introduction

Following several debt crises of 1970ss, 1880ss and 1890ss, a big figure of academic documents have emerged to name for easing on the comparatively big accretion stock of external liability by some of developing states. In add-on, during the Asiatic fiscal crisis many of the crisis-hit states were those who were saddled with heavy external debt ( Yu, 2001 ) . Furthermore, the increasing degree of the stock of external liability among most of the developing economic systems has raised concerns and leads to the inquiry of whether a state with high stock of external liability is still sustainable. Therefore, this state of affairs has intensified involvement and drawn attending to the durable deduction of policy action on the state external debt sustainability place.

Malaysia has shown an increasing form of entire outstanding external debt since 1990. As at the terminal of 2011, Malaysia ‘s entire outstanding external debt was recorded at RM257235 million which is tantamount to 31.1 per centum of Gross National Income ( GNI ) ( Central Bank of Malaysia, 2011 ) . In add-on, the entire short-run debt accounted for 40.1 per centum of entire external debt while the entire international militias could cover 4.1 times of entire short- term debt. The present value of entire external debt as per centum of GNI and as per centum of exports of goods and services ( XGS ) remain low runing from 26.5 to 35.7, therefore Malaysia is classified as less indebted state with both indexs are less than 48 per centum and 132 per centum.[ 1 ]However, as at terminal of Q4 2011, the debt service of entire external debt as per centum of exports of goods and services ( TDS/XGS ) amounted at 10.3 per centum which consider the highest debt service ratio since 1991. Intuitively, the addition in debt service ratio could potentially due to an addition in entire debt refund or lessening in exports of goods and services ( or alterations in debt refund are higher than the alterations in exports of goods and services ) . The debt service ratio as per centum of exports of goods and services shows how much of the state exports gross will be used up in serving its debt. However, Clement et Al. ( 2003 ) claim that the external debt service could potentially impact growing by herding out private investing or changing the composing of public disbursement. Furthermore, high external debt service is one of the cardinal obstructions to run intoing basic demands in developing states ( Clement et al. , 2003 ) . As such with high degree of external debt together with high debt service ratio, has underline the urgency to look into on Malaysia external debt place in inside informations.

In add-on, in a universe of decreasing returns, the development states would derive from capital flight through mechanisms such as international trade and foreign investing. Furthermore, the Dual-gap theory that explains the nest eggs spread and foreign exchange spread ( which is an extension of Harrod-Domar growing theoretical account ) has highlighted the motive of the debut of debt in a growing theoretical account. External debt has become one of the of import beginnings for capital accretion in the economic system.[ 2 ]External debt could excite growing via the attractive force of extra investing but on the contrast, besides curtail growing by making deterrences for investing and equal economic policy if its volume is unwieldy ( Shymanovich and Kirchner, 2011 ) . In other words, if the external debt has been allocated expeditiously to the investing, state would see the positive consequence of the foreign adoption. Furthermore, holding the benefit of economic growing could besides better the capableness of serving the debt without herding out the state ‘s investing. However, the external debt could besides slow-down the economic system and go a load that had to be paid by the future coevals.[ 3 ]In a instance where the adoptions were non expeditiously allocated into development undertakings, it would burthen the state with the high degree of liability and force the rising prices rate up. Ironically, the debt needs to be repaid by future coevals while the targeted sectors are non turning and benefited from the adoption. On the other manus, if a state were to see an inauspicious impact from its external adoption, it would impact the investor ‘s assurance since the debt would non hold been fruitfully channeled into investing or economic growing ( Clements et al. , 2003 ; Chowdhury, 2001 ; Wijeweera et al. , 2005 ; Sen et al. , 2007 ) . As a consequence, with high degrees of liability, states would non be able to bring forth more economic growing and would neglect to refund their debts.

At the other terminal of the spectrum, debt refund has been used as a signaling device to uncover the competency of the authorities and can expose the basicss of the state ‘s economic system ( Sandleris, 2008 ) . Furthermore, the ability to refund debt is closely related to Malaysia ‘s autonomous debt evaluation ( chance of default ) every bit good as the hereafter adoption chances. Hazard of default, rescheduling and arrears are likely to increase the volatility of future influxs and extra loaning, while entree to capital markets depends on the perceived sustainability ( Gunning and Mash, 1998 ) . As such, any negative and unsure elements in Malaysia ‘s external place would perchance detain any foreign investing into the state. In other words, by sing the findings of this paper, authoritiess could explicate policies that could forestall states from being default or in a debt-overhang state of affairs.[ 4 ]

A existent image of the external debt place is of import for authorities policy preparation every bit good as to an investor ‘s ability to strategize their investing determination. However, bing economic sciences theories provide no distinct anticipation on the probe of state external debt place. Concentrating on long skyline return, the aim of this paper is to analyse the external debt sustainability place of Malaysia economic system. In peculiar, this paper examines Malaysia ‘s intertemporal budget restraint of the external place. Furthermore, this paper is besides concerned with the importance of the external debt to state economic growing in the long-run. Finally, analysis of the causal consequence of debt-growth would supply some grounds from short-term point of position. Our paper is the first that provided a comprehensive analysis on the Malaysia external debt place. These analyses are profound since any consequences found would supply item overview on the Malaysia external debt sustainability place. Furthermore, this paper could give an indirect signal to creditors on a state ‘s ability to serve its debt in the hereafter every bit good as possible investors. To the best of our cognition, none of the old empirical surveies has been carried out to analyse this issue in inside informations[ 5 ]. Therefore, this survey attempts to make full this spread in the literature. The paper is laid out as follows. Section II offers brief overview of the literature on external debt. Section III outlines the information and methodological analysis while the empirical consequences are presented in subdivision IV and subdivision V concludes the paper.

## Literature reappraisal

Most of the old literatures relate the external debt sustainability place with state ‘s ability to run into the current and future external duties without running into arrears and finally to a drastic displacement in balance of payment ( Arnone et al. , 2005 ; Akyuz, 2007 ; Wyplosz, 2007 ) . IMF ( 2002 ) besides defines the debt sustainability as a state of affairs in which a borrower is expected to be able to go on serving its debt without an unrealistic big hereafter rectification to the balance of income and outgo. Meanwhile under the Heavily Indebtedness Poor Countries ( HIPC ) initiatives, a state could be defined in a sustainable external debt place, if a state can run into its current and future external debt service duties in full, without resort to debt alleviation, rescheduling of debts, or the accretion of arrears and without compromising growing ( IMF, 1997 ) . Furthermore, Shymanovich and Kirchner ( 2011 ) specify the debt sustainability from creditor ‘s point of position which measured by the ability and the willingness of the state to serve its liabilities, which implies that the costs of serving the debt are lower than the cost of bankruptcy.

Several surveies conducted by the IMF, World Bank and independent research worker to set up method on mensurating state debt sustainability place. The past three decennaries have witnessed the development of literature on external debt- growing related surveies. IMF has initiated survey on the debt sustainability place for the low income states that receive the HIPC enterprise. The debt sustainability analysis is dominated by two watercourses of attacks viz. fiscal sustainability and economic sciences sustainability attack ( Arnone et al. , 2005 ) . The debt sustainability appraisal is based on emphasis trials from sets of index with mention to a baseline scenario. The debt sustainability appraisal model mostly consists of accounting individualities, with few economic sciences relationship and hence the projections are generated by an implicit in economic sciences construction ( Hostland and Karam, 2005 ) . Furthermore, the fiscal sustainability analysis is based on gauging and comparing index with adoptive thresholds. In add-on, liquidness, solvency and willingness to pay are the chief attack in analysing state external debt sustainability place from fiscal sustainability point of position ( Arnone, 2005 ; Onel and Utkulu, 2006 ) .[ 6 ]However, it is hard to correctly predict the degree of debt in relation to future growing, grosss, exports and other economic index from the fiscal sustainability attack. Therefore suggest the solvency attack in analysing state debt sustainability place. Unit root and cointegration trial provided utile tools in deriving penetration into the long-term deductions of a authorities or a state ‘s intertemporal solvency.

However, empirical literature in measuring state sustainability is still dawdling behind with equivocal replies. A survey by Shymanovich and Kirchner ( 2011 ) find that Belarus faces the possible job of external debt sustainability. The degrees of outstanding external debt and future outgo on public external debt service are the chief indexs in foregrounding the potency of debt overhang job. In other words, Belarus has to reconsider its economic policy to avoid big demand for external funding. Meanwhile, survey concentrated on the HIPCs examines a figure of structural factors impacting the external debt sustainability. In peculiar, this paper shows that the export base remains narrow, ( financial gross mobilisation is uneven ; and the policy and institutional models are still below universe norm. This paper highlights that in accomplishing and keeping long-run debt sustainability, it will necessitate continued structural reforms, seasonably donor support, and close monitoring of the mix between debt and grant funding ( Yang and Nyberg, 2009 ) .

Meanwhile, Callaghan and Kan ( 2007 ) find that most of the crisis-hit states, specifically Thailand, Philippines, South Korea and Indonesia, uncover the unsustainability of the current history place during the pre-Asian crisis period. In add-on, a survey by Baharumshah et Al. ( 2003 ) argue that current history shortages in Indonesia, Philippines and Thailand were non in the long-term steady province, connoting misdemeanor of the intertemporal balance theoretical account prior to the Asiatic crisis. In other words, the unsustainable current history places could be a signal that the crisis might break out.

A more flexible attack is to analyse the impact of external debt on state economic growing. Over the past decennaries, faculty members and policy-makers have shown consistent involvement in and have made attempts to look into and develop the theory on the nexus between debt and economic growing. Previous empirical grounds has found assorted consequences to back up the debt-overhang hypothesis. Chowdhury ( 2001 ) , Clements et Al. ( 2003 ) , Mohamed ( 2005 ) , Wijeweera et Al. ( 2005 ) and Sen et Al. ( 2007 ) find grounds to back up the negative consequence of external debt on a state ‘s economic growing. In other words, an addition in the stock of debt has a negative impact on economic growing. Previous empirical plants done by Choong et Al. ( 2010 ) suggest that external debt has a negative consequence on Malaysia long-term economic growing. Furthermore, the Granger causality trial besides reveals the being of short-term causality linkages between external debt and economic growing. Meanwhile, Pattilio et Al. ( 2004 ) , Cordella et Al. ( 2005 ) , and Imbs and Ranciere ( 2005 ) happen non-linearity in the debt-growth relationship. Furthermore, Patillio et Al. ( 2004 ) study that the mean impact of debt on per capita growing appears to go negative for debt degrees above 160 to 170 per centum of exports and 35 to 40 per centum of GDP. Clements et Al. ( 2003 ) suggest that, above the threshold of 20-25 per centum of GDP and 101-105 per centum of exports, external debt is associated with lower rates of growing for 55 low income states.

On the other spectrum, there are limited surveies conducted to analyse Malaysia external debt place. Choong et Al. ( 2010 ) , Loganathan et Al. ( 2010 ) and Bakar and Hassan ( 2008 ) are the lone surveies conducted to analyse the impact of external debt and economic growing in Malaysia. However, Choong et Al. found that all constituents of debts have negative impact on long-term economic growing while back uping the short-term causality linkages. Meanwhile, by utilizing Vector Autoregression ( VAR ) , Bakar and Hasan ( 2008 ) uncover a positive consequence of external debt to Malaysia economic growing. With sample coverage that is most likely the same, 1970 to 2006 and 1970 to 2005 for Choong et Al. ( 2010 ) and Bakar and Hassan ( 2008 ) severally, both surveies could non consentaneous conclude the impact of external debt to Malaysia ‘s economic growing. In add-on, Loganathan et Al. ( 2010 ) suggest a important long-term and short-term relationship between external debt and macroeconomic variable public presentation. Thus conclude that Malaysia ‘ external debt is sustainable with its macroeconomic public presentation. However, with little sample size of 20 twelvemonth ( from 1988 to 2008 ) , the consequences could potentially take to bias and specious appraisal.

## Model, Method and Data

The impression of external debt sustainability is rather complex and broad since it would see different positions and attacks. This paper uses the intertemporal balance theoretical account ( solvency attack ) proposed by Husted ( 1992 ) to analyse whether the state ‘s current history budget restraint is intertemporally balanced. Furthermore, the debt-growth nexus analysis and the causality ( short-term ) consequence of debt and economic growing of Malaysia supply penetration and groundss on the existent scenario of the Malaysia ‘s external debt place.

## 3.1 The Solvency Condition

In this paper, we use a dynamic attack by Husted ( 1992 ) to analyze the Malaysia ‘s current history ( external ) sustainability place. With the premise that persons live in little unfastened economic systems where person is allowed to borrow and impart in the international market, the intertemporal budget restraint in the current period T is given by

( 1 )

where is the current ingestion ; is end product ; is international adoption which could be positive or negative ; is investing ; and is the one-period universe involvement rate, severally. represents the net debt, corresponds to the state ‘s external debt from the old period. In add-on, the person is assumed to maximise lifetime public-service corporation topic to its budget restraints. By keeping ( 1 ) in every period:

By rearranging and allowing n nearing eternity:

( 2 )

where

where represents the trade balance in period T, ( exports, XX-imports, MM ) and is the price reduction factor. In equation 2, the first term represents the trade balance while the 2nd term explains the state ‘s external debt. If the 2nd footings peers to zero, the entire sum that state borrow in international market equals the present value of the future trade balance. On the other manus, if the bound term is non-zero and is positive, this could explicate that state is “ bubble-financing ” its external debt. While in the instance where is negative and the bound is non-zero, the state is doing pareto-inferior determination where public assistance could be raised by imparting less ( Husted, 1992 ) .

In order to deduce a testable empirical theoretical account, Husted ( 1992 ) rewrites the equation ( 1 ) . First, by presuming that the universe involvement rate is stationary with unconditioned mean R, the equation ( 1 ) could be expressed as

( 3 )

Here. It can be resolved frontward to obtain:

( 4 )

where is the first difference operator. The left-hand side of ( 3 ) represents passing on imports every bit good as involvement payments on net foreign debt. is subtracted from both sides ( 4 ) and each side becomes the economic system ‘s current history. Assume that X and Z are both non-stationary procedures, each integrated of order 1, I ( 1 ) ,

( 5 )

( 6 )

where are drift parametric quantities ( perchance equal to nothing ) and the are stationary procedures. In this instance, equation ( 5 ) can be re-expressed as

( 7 )

where

and.

Assuming that the bound term in equation ( 7 ) peers to zero and can be transformed into a standard testable equation:

( 8 )

where is exports of goods and services and is imports of goods and services plus net involvement payment and cyberspace transportation payment. If XX and MM are non- stationary, I ( 1 ) procedure, so a cointegration relationship between these two variables is a necessary status for the state to be solvent. Cointegration is a necessary status for the economic system to be obeying its intertemporal budget restraint. While =1 is a sufficient status for the budget restraint to be obeyed for the cointegrated series. This indicates that an addition in are equal with grows in. In other words, the cointegration model could be related with the sustainability place where the and can non float apart excessively far. Despite obeying its intertemporal budget restraint the coefficient must be equal to one to supply sufficient status of external sustainability. Intuitively, the trial determines whether a state is able to prolong its external shortage without defaulting on its debt by utilizing intertemporal budget restraint ( Onel and Utkulu, 2006 )

## 3.2 Debt-Growth Nexus

One of the necessary conditions to accomplish a sustainable debt place is a state ‘s capableness to serve debt without impedes the economic growing. In other words, a state is in a sustainable debt place when it could pull off to bring forth economic growing. Inspired by the dual-gap theory, Otani and Villanueva ( 1989 ) , Agenor ( 2000 ) , Villanueva ( 2003 ) , and Mariano and Villanueva ( 2006 ) develop a theory on the relationship between external debt and economic growing through several mechanisms such as financial policy accommodation. This has revealed the function of external debt in lending to a state ‘s economic growing. On the other manus, Villanueva ( 2003 ) has extended the standard neoclassical growing theoretical account that incorporates endogenous proficient alteration and planetary capital market. In add-on, Villanueva ( 2003 ) defines the aggregative capital stock as the accrued amount of domestic economy and net external adoption. As has been explained in the neoclassical growing theoretical account, a state that intends to increase its economic growing could increase its economy, which would take to an addition in investing and, to a lesser extent, economic growing. In add-on, Villanueva ( 2003 ) claims that economic growing will non increase until capital stock has risen to a certain degree. As such, a rise in capital through debt accretion will ensue in an addition in salvaging rate, investing rate and economic growing. Therefore, to look into whether the external debt has contributed to the economic growing, the basic growing theoretical account to be estimated include Real GDP per capita ( dependent variable ) as a placeholder of economic growing. In add-on, the independent variable includes external debt, labour force rate to represents the rates of growing of factor inputs in the production map, and openness gaining controls for authorities policy. Since the observations are on a quarterly footing, for maximal order of the slowdowns in the ARDL theoretical account, a lag order of 4 is chosen. This paper starts the analysis with some pre-testing trials for clip series processs before proceed to the cointegration trial.[ 7 ]

The Autoregressive Distributed Lag ( ARDL ) bound trial developed by Pesaran et Al. ( 2001 ) is being employed for cointegration analysis. One of the advantages of the Pesaran et Al. ( 2001 ) attack is that this method is robust to little sample sizes ( Pattichis, 1999 ; Mah, 2000 ; Tang and Nair, 2002 ) . Basically, the edge trial developed by Pesaran et Al. ( 2001 ) is the Wald trial ( F-statistic version of the edge proving attacks ) for the lagged degree variables in the right-hand side of An Unrestricted Error Correction Model ( UECM ) . That is, the void hypothesis of a non-cointegrating relation ( Ho: I?1= I?2= I?3=aˆ¦= I?n = 0 ) is tested by executing a joint significance trial on the lagged degree variables. The asymptotic distribution of the F-statistic is non-standard under the void hypothesis of no cointegrating relationship between the examined variables, irrespective of whether the explanatory variables are strictly I ( 0 ) or I ( 1 ) .

Under the conventionally used degrees of significance such as 10 per centum, 5 per centum and 1 per centum, if the statistic from a Wald trial falls outside the critical bounds value ( lower and upper values ) , a conclusive illation can be made without sing the order of integrating of the explanatory variables. If the F-statistic exceeds the upper critical edge, the void hypothesis of no cointegrating relationship can be rejected. However, if the trial statistic ( F-statistic ) falls below the lower critical edge, so the nothing of non-cointegration can non be rejected. If the F-statistic falls between the upper and lower bounds, a conclusive illation can non be made. The 2nd phase of the ARDL attack is to gauge the coefficients of the long-term cointegrating relationship and the corresponding mistake rectification theoretical account. The lagged mistake rectification term ( et-1 ) derived from the mistake rectification theoretical account is an of import component in the kineticss of the cointegrated system as it allows for accommodation back to the long-run equilibrium relationship given a divergence from the last twelvemonth.

## 3.3 The Causal Effect of Debt and Economic Growth

The causal consequence between external debt and economic growing would supply grounds on the impact of external debt to state economic growing in short-run. As such this analysis would find whether stock of external liability causal state ‘s economic growing or the economic growing causal the stock of external liability or there is bidirectional consequence. This paper proceeds with the causality bootstrapping method with endogenous slowdown length proposed by Hatemi-J and Hacker ( 2010 ) . This method is based on the standard farmer causality trial that performed on

( 9 )

( 10 )

where growing is represented by the existent GDP per capita ( changeless 2000 monetary values ) while ED signifies the entire external debt ( in RM million ) . The reported F-statistics is the Wald statistics where the void hypothesis is that external debt does non Granger-cause economic growing as in ( 9 ) statistics for the joint hypothesisagainst. Meanwhile the void hypothesis for ( 2 ) is that economic growing does non Granger-cause external debt if against. Bidirectional causality exists if both void hypotheses are rejected. However, in the standard process of farmer causality trial, the slowdown length is assumed to be known a priori where the pre-selection of the slowdown order may impact the distribution of the trial statistics. In add-on, Hatemi-J and Hacker ( 2010 ) reference that, the pick of slowdown order could act upon the statistical illations of the empirical testing ( back uping grounds on the failing of farmer causality ) . As such, in method proposed by Hatemi-J and Hacker ( 2010 ) the slowdown length pick is determined endogenously by utilizing the bootstrapping method. Furthermore, bootstrap method appears to hold better size belongingss, robust to the being of autoregressive conditional heteroscedasticity ( ARCH ) and have better power compared to the asymptotic trial for the same existent size ( Hatemi-J and Hacker, 2010 ) .[ 8 ]

The sample consists of economic sciences informations during the period 1991Q1 to 2011Q4. The informations are collected from the IMF/IFS statistics and Monthly Bulletin of Central Bank of Malaysia. Details of the variables are attached in Appendix 1.

## Empirical consequences

This paper examines the sustainability of external place in the first portion of the empirical analysis. Meanwhile the 2nd and 3rd analyses estimate the long-term and short tally impact of external debt to state economic growing severally.

## 4.1 External debt sustainability place

The consequences of unit root trial of Augmented Dickey Fuller ( ADF ) trial, modified Dickey-Fuller t-test ( known as the DF-GLS trial ) proposed by Elliott et Al. ( 1996 ) , Philips-Perron ( PP ) trial and Kwiatkowski-Phillips-Schmidt-Shin ( KPSS ) trial are reported in Table 1 in degrees and first differences, severally. The trial statistics of ADF, PP, DF-GLS and PP trial are found to reject the void hypothesis at 5 per centum significance degree for XX and MM at first difference. In consensus with the other unit root consequences, the KPSS unit root trial reveals grounds of rejection of the nothing of stationary ( at 5 per centum significance degree ) . Furthermore, the trial could non happen grounds to reject the nothing at first difference proposing XX and MM are I ( 1 ) variables. Therefore, the reported consequences confirmed that the XX and MM variables are first difference variables, I ( 1 ) . After corroborating the non-stationarity of the variables ( of which none of the variables are I ( 2 ) ) , we proceed by gauging equation ( 8 ) by using the ARDL edge trial.

## Table 1: Unit of measurement root trial for debt sustainability analysis

ADF

DFGLS

PP

KPSS

Degree

First difference

Degree

First difference

Degree

First difference

Degree

First difference

Twenty

-0.073

-10.081*

1.613

-9.889*

0.559

-12.012*

1.138*

0.500

Millimeter

-0.057

-5.697*

1.520

-5.736*

0.350

-15.991*

1.137*

0.316

Notes: * and ** denotes rejection at 5 and 10 per centum significance degree. The void hypothesis for Augmented Dickey Fuller trial, Elliott-Rothenberg-Stock DF-GLS trial -Fisher trial and Phillips-Perron trial is that the series is a unit root procedure. The void hypothesis for Kwiatkowski-Phillips-Schmidt-Shin trial is the series is stationary. The unit root trial is based on the instance series with changeless term. Variable Twenty represents exports of goods and services ; MM denotes imports of goods and services plus current transportation and income.

Table 2 provides grounds on the co-integration trials consequences performed on the variables XX and MM. As a little unfastened economic system, Malaysia could potentially been affected during the fiscal and economic crisis. As such, the appraisal is carried out with and without the inclusion of silent person of fiscal and economic crisis. With a maximal figure slowdown of 4 imposed, the computed F-statistics value of 4.432 exceeds the critical edge ( 3.793 – 4.378 ) at the 5 per centum significance degree for the theoretical account that includes the silent person variable. Furthermore the consequences revealed that the mistake rectification coefficient is statistically negative at 5 percent degree of significance proposing a rejection of the void hypothesis of no cointegration between XX and MM. Since there is grounds of cointegration between the XX and MM variables, therefore we suggest that Malaysia obey its external intertemporal budget restraint. In add-on, mistake rectification term explains the velocity of convergence towards equilibrium if dazes ( sudden halt ) occur. Based on the accommodation coefficient, Malaysia is found to hold a slow stage of velocity of convergence to equilibrium of 14.8 per centum.

## Table 2: F-statistics for proving the being of long-term relationship

## Coefficient

## p-value

Millimeter

1.053

( 0.074 )

0.000

Dummy fiscal and economic crisis

0.322

( 0.176 )

0.072

Intercept

Error rectification term

-0.1481

( 0.062 )

0.019

F- statistics

4.432

Pesaran et Al. ( 2001 ) critical values ( 5 per centum )

3.793, 4.378

## Diagnostic trials

Adjusted R-squared

0.735

Consecutive Correlation

3.867

0.424

Functional Form

1.683

0.194

Heteroskedasticity

1.343

0.247

Notes: * and ** denotes important and 5 and 10 significance degree. The critical values are provided by Pesaran et Al. ( 2001 ) , unrestricted intercept and no tendency. All theoretical accounts include intercept in the appraisal. The void hypothesis is no long-term relationship. Numbers in brackets represent the criterion mistake. The void hypothesis is no long-term relationship. The ARDL theoretical account is selected based on Schwarz Bayesian Criterion ( SBC ) . The consecutive correlativity trial is based on Lagrange multiplier trial of residuary consecutive correlativity, the functional signifier trial is based the Ramsey ‘s trial, and the heteroscedasticity trial is based on the arrested development of squared remainders on squared fitted value. Numbers in parenthesis represents the p-value.

Meanwhile, the coefficient of parametric quantity MM is evaluated to corroborate the sustainability place. It is sufficient to hold or ( -1 ) in order for the flight of the debt to GDP non to diverge in an infinite skyline. In other words, the MM estimated coefficient is estimated at 1.053, therefore suggests a strong sustainability of Malaysia external debt place. In add-on, none of the trial statistics could reject the nothing of no consecutive correlativity, functional signifier and heteroscedasticity in the theoretical account, therefore proposing that the appraisal analysis is indifferent and efficient.

## 4.2 Debt-growth link

Table 3 presents the consequence of F-statistic for proving the long-term relationship between external debt and economic growing. With a maximal figure slowdown of 4 imposed, the computed F-statistics value of 4.1012 exceeds the critical edge ( 2.850 – 4.049 ) at the 5 per centum significance degree. This implies that the void hypothesis of no cointegrating long-term relationship can be rejected. The grounds of long tally relationship regulations out the possibility of any specious relationship bing between the variables.

## Table 3: F-statistics for proving the being of long-term relationship

## F-statistics

## Significance degree

## Pesaran et Al. ( 2001 ) critical values

I ( 0 )

I ( 1 )

4.1012

5 per centum

2.850

4.049

10 per centum

2.425

3.574

Notes: * and ** denotes important and 5 and 10 significance degree. The critical values are provided by Pesaran et Al. ( 2001 ) , unrestricted intercept and no tendency. All theoretical accounts include intercept in the appraisal. The void hypothesis is no long-term relationship.

Once a long-term cointegration relationship has been established, the estimations of the ARDL long-term coefficient for the estimated theoretical account are presented in Table 4. The external debt variables are found to hold a negative and important ( at 5 per centum significance degree ) consequence on Malaysia ‘s economic growing. This paper besides tests for the hardiness cheque with the inclusion silent person of fiscal and economic crisis.[ 9 ]The consequences do non change sanely and is attached at Appendix 5. A 1 per centum addition in external debt is associated with an addition in economic growing of 0.283 per centum. In other words, the external adoptions are found to deteriorate the state ‘s economic growing. Other control variables, such as labour force and openness is found to important ( at least as 5 per centum significance degree ) consequence in explicating the existent GDP percapita degree. The consequence implies that any fluctuation and motion in the labour force, openness and external debt are found to be cointegrated with the alterations in existent GDP. The mistake rectification theoretical account representation for the ARDL theoretical account is based on the Schwarz Bayesian standard. The mistake rectification term coefficient is estimated at -0.234, is statistically important, and has the right mark, guaranting that the long-term equilibrium is come-at-able.

## Table 4: Estimated Long Run Coefficients utilizing the ARDL Approach: Debt-growth link

## Coefficient

## p-value

Labor force

-2.031

( 0.612 )

0.001

Openness

1.318

( 0.198 )

0.000

External debt

-0.283

( 0.128 )

0.030

Intercept

14.560

( 3.910 )

0.000

Error rectification term

0.234

( 0.512 )

0.000

## Diagnostic trials

Adjusted R-squared

0.67

Consecutive Correlation

3.676

0.452

Functional Form

0.093

0.761

Heteroskedasticity

1.089

0.297

Notes: * and ** denote important at 5 and 10 per centum significance degrees. Numbers in brackets represent the criterion mistake. The void hypothesis is no long-term relationship. The ARDL theoretical account is selected based on Schwarz Bayesian Criterion ( SBC ) . The consecutive correlativity trial is based on Lagrange multiplier trial of residuary consecutive correlativity, the functional signifier trial is based the Ramsey ‘s trial, and the heteroscedasticity trial is based on the arrested development of squared remainders on squared fitted value. Numbers in parenthesis represents the p-value.

This suggests that economic growing is seting slow stage at 23.4 per centum to alterations in the explanatory variables before making its equilibrium. Table 6 provides inside informations analysis on the negative relationship between external debt and Malaysia economic growing. It has been noted that entire external debt consist of entire long-run and entire short term of external debt.[ 10 ]It is found that the negative and important relationship between the external debt and economic growing ( at 5 per centum significance degree ) is chiefly from the entire long-run external debt. Meanwhile, the short-term external debt is found to be undistinguished in lending to Malaysia ‘s external debt. In peculiar, it shows that the federal authorities debt contributed strong positive consequence to economic growing which is important at least 1 percent significance degree. While the private sector external debt besides shows a positive relationship with Malaysia ‘s economic growing ( at least at 10 per centum significance degree ) . Surprisingly, the NFPE ‘s external debt has negative and important ( at 1 per centum significance degree ) with the state ‘s economic growing.

## Table 5: Estimated Long Run Coefficients utilizing the ARDL Approach: Debt-growth link by adulthood and sector

## By adulthood

## By sector

## Coefficient

## p-value

## Coefficient

## p-value

Labor force

-2.017

( 0.668 )

0.004

-1.140

( 0.418 )

0.008

Openness

1.374

( 0.241 )

0.000

0.977

( 0.125 )

0.000

Long term debt

-0.262

( 0.115 )

0.026

Short-run debt

-0.095

( 0.090 )

0.291

Federal authorities debt

0.193

( 0.049 )

0.000

Non Financial Public Enterprises ( NFPE ‘s ) debt

-0.346

( 0.101 )

0.001

Private sector debt

0.192

( 0.100 )

0.058

Intercept

14.446

( 4.289 )

0.001

6.785

( 2.668 )

0.013

Error rectification term

-0.217

( 0.058 )

0.000

-0.325

( 0.053 )

0.000

## Diagnostic trials

Adjusted R-squared

0.659

0.728

Consecutive Correlation

6.585

0.160

3.409

0.492

Functional Form

0.015

0.903

1.012

0.331

Heteroskedasticity

1.703

0.192

0.612

0.434

Notes: * and ** denotes important at 5 and 10 per centum significance degree. Numbers in brackets represent the criterion mistake. The void hypothesis is no long-term relationship. The ARDL theoretical account is selected based on Schwarz Bayesian Criterion ( SBC ) . The consecutive correlativity trial is based on Lagrange multiplier trial of residuary consecutive correlativity, the functional signifier trial is based the Ramsey ‘s trial, and the heteroscedasticity trial is based on the arrested development of squared remainders on squared fitted value. Numbers in parentheses represent the p-value.

In add-on, Table 4 and 5 besides provides diagnostic consequences from the estimated theoretical account. Based on the LM trial statistics, none of the trial statistics could reject the nothing of no consecutive correlativity, functional signifier and heteroscedasticity in the theoretical account. As such, the theoretical accounts have conceded all the diagnostic trials against functional signifier misspecification, consecutive correlativity, and heteroscedasticity for the estimated theoretical account, therefore proposing that the appraisal analysis is indifferent and efficient.

## 4.3 The Causal Effect between Debt and Economic Growth

Table 6 studies the estimated consequences of the causal relationship. The consequences show that the void hypothesis of external debt does non do Real GDP and Real GDP does non do external debt could non be rejected, turn outing that there is no grounds on the causal consequence of external debt and state economic growing in the short-run.

## Table 6: Consequences of bootstrap trial for causality with endogenous slowdown length pick: External debt and economic growing

Wald-Statistics

W critical values

Lag length

External debt a†’ Real GDP

0.003

4.191

2.937

1

Real GDP a†’ External debt

2.423

4.013

2.751

1

External debt a†’ Real GDP per capita

0.001

4.248

2.922

1

Real GDP per capitaa†’ External debt

2.091

3.946

2.735

1

Notes: * and ** denotes significance at 5 per centum and 10 per centum degree. The appraisal is based on the maximal slowdown of 4 by utilizing the SBC standard.

## Decision

The purpose of this article is to look into Malaysia ‘s external debt place. As the impression of external debt sustainability analysis is rather complex and broad, this paper uses assorted attacks in analysing the anatomy of Malaysia external debt place. The first portion of the analysis examines the sustainability of external by utilizing the intertemporal budget restraint. The ulterior portion of the analysis concerned with the importance of the external debt to state economic growing in long-term and short-term. By utilizing a battery of univariate unit root trials every bit good as a cointegration trial, we could happen necessary and sufficient status to back up a strong signifier of sustainability of Malaysia external place. In other words, Malaysia external place is in solvent status. However, the consequences substantiate the impression that the accretion of external debt is associated with a negative consequence to Malaysia ‘s economic growing. Furthermore, despites the positive consequence of federal authorities and private sector debt to state economic growing, the estimations prove that the NFPE ‘s external debt has contributed negatively to state ‘s economic growing. In concurrence with the debt-growth link relationship, there is no grounds found to back up a causal nexus between the external debt and economic growing in short-run. Besides this, we find grounds that debt service ratio does non herd out the Malaysia investing rate. Intuitively, even though the external debt is negatively associated with economic growing, Malaysia is found to be safe from being in the debt overhang hypothesis. However, the negative consequence could be interpreted as the chief symptom of a state before it falls into debt overhang job.