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Determinants of External Debt: The Case of Malaysia

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Emerging Trends in Banking and Finance

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Abstract

Since the 1980’s, Malaysia’s external debt has been on an increase as a result of several economic factors, including two economic crises. Rapid increase in the external debt has become a national concern. In this study, we aim to investigate the determinants of Malaysia’s external debt for the period of 1970 to 2013 by using annual data. For this aim, we have performed the Johansen cointegration test, vector error correction model (VECM), and Granger causality test. The findings show that there is a long-run relationship between the variables and the GDP, recurrent and capital expenditure Granger causes external debt. These findings indicate that GDP growth is a solution for the external debt problem. In contrast, we believe that recurrent expenditures should especially be kept under control, and we offer several policy recommendations, such as reforming subsidy systems. Also, finding alternative sources to finance capital expenditure is important for a healthy growth of the economy.

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Notes

  1. 1.

    For the theoretical framework that justifies the need for external borrowing by developing countries, see McFadden et al. (1985).

  2. 2.

    For counter arguments, see Panizza and Presbitero (2014).

  3. 3.

    To determine whether series are stationary or not we also investigate grapy of the data and ACF graphs. Both show that, compatible with formal unit root test results, all series are integrated order of 1.

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Authors and Affiliations

  1. Department of Banking and Finance, Eastern Mediterranean University, Famagusta, North Cyprus, Turkey

    Korhan Gokmenoglu & Rabiatul Adawiyah Mohamed Rafik

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  1. Korhan Gokmenoglu
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  2. Rabiatul Adawiyah Mohamed Rafik
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Correspondence to Korhan Gokmenoglu .

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Editors and Affiliations

  1. Eastern Mediterranean University, Famagusta, Cyprus

    Nesrin Ozatac

  2. Department of Banking and Finance, Eastern Mediterranean University, Famagusta, Cyprus

    Korhan K. Gökmenoglu

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Gokmenoglu, K., Rafik, R.A.M. (2018). Determinants of External Debt: The Case of Malaysia. In: Ozatac, N., Gökmenoglu, K. (eds) Emerging Trends in Banking and Finance. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-01784-2_2

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