This article first appeared in Forum, The Edge Malaysia Weekly on August 18, 2025 - August 24, 2025

It’s another quinquennium (five-year period), and so another Malaysia Plan. At the time of writing, the proposed 13th Malaysia Plan (13MP) has been read out in the Dewan Rakyat. Some very big numbers were announced: 

RM611 billion compared with the 12th Malaysia Plan’s RM400 billion. What immediately caught my eye was that the government’s share was only RM430 billion, the remaining being RM61 billion through public-private partnerships and 

RM120 billion by government-linked companies (GLCs) and government-linked investment companies (GLICs). The last two sectors haven’t been so deeply involved before; one will reserve judgement until all the details are out (transparency, remember?). That is a lot of money and the practice has always been to fund development expenditure through borrowings. That raises the spectre of higher amounts of debt, both governmental and for the GLCs and GLICs, and opens the door to hot money.

Having been directly involved in the capital markets for some three decades, one remembers how in the past plan periods, cognisance was made of the role of capital markets. I would be the first to admit that no Malaysia Plan actually factored in capital markets’ roles (read: their platforms as a means to fund the plans), but strong eyes, and hands as were rumoured, were cast onto the capital markets. Simply put, not just as a good source of funding, but capital gains translated into profits in the hands of the players, and the higher returns and dividends were important in terms of wealth distribution and poverty eradication in the country. What countries typically did was to make the investment environment so attractive internationally that foreign parties quickly loosened their purse strings and grabbed the mouth-watering opportunities being presented. Global sources of funding economic development needed to be found and international ones showed how highly the world viewed the country, or so said the popular taglines of the day.

So, does hot money, herein defined as money that goes into capital markets across borders, actually help economic development?

The long answer is that it winds its way into the hands of entrepreneurs and government entities looking for working capital to boost their businesses or for infrastructure building, among others. This comes in the form of new share issues or new fixed-income issues. Other players, hot money ones or otherwise, take the opportunities in the secondary markets.

The short answer is yes, it does. A landmark study by Zhang, Chen, Huang and Shenoy in 2019 showed that every 1% increase in hot money is associated with a 0.29% increase in industry output and a 0.25% increase in service output.

Here’s the bad news: Hot money is flighty. That simply means that at the slightest provocation, such investors abandon their positions. Typically, instruments that had once housed this hot money and most probably had been driven to high prices now find themselves dumped with alacrity. This sharp downward dive in prices hurts other shareholders, presumably citizens, and puts a dark cloud over any future offerings. That drives to a screeching halt any new plans for offering vehicles to drive new projects for national development.

The worst part is that these same flighty investors will vote with their feet when it comes to staying in that country that they had invested in. The currency of the investee country takes a dive as well and in doing so invites imported inflation as well as makes having to pay any foreign debt in the immediate term very much more expensive, bringing in the spectre of debt defaults. Then, almost as if it was a dispatching stab to the heart, the international reserves of a country fall precipitously, alarming others who are still in the country that they might not be able to convert their local currency into foreign currency; all this with massive depreciation to the exchange rate as they watch with ever-widening eyes.

Thus, the rush to the exit becomes a tsunami, made worse if the local population themselves seek to change their local currency into an international one (a process I liberally named “money base conversion”). Soon enough, the images of wheelbarrows of money needed to buy a loaf of bread, like during the German hyper-inflationary episode between WWI and WWII, comes to life in that country. Wealth destruction at its worst.

Evidence of this is very plentiful; from what happened in Thailand, Indonesia, South Korea and Malaysia during the Asian financial crisis of 1997 and 1998 as well as the PIIGS countries of the European Union during the Global financial crisis of 2007 and 2008 (PIIGS being Portugal, Ireland, Italy, Greece and Spain). The sheer amount of public and private wealth and productivity destruction is mind-blowing. Wikipedia noted that the global financial crisis cost some 

US$2 trillion of global gross domestic product, while Asia’s GDP fell by around US$227 billion in 1997 and 1998.

Volumes have been written about these experiences, collectively and individually, so self-study is possible. Suffice to say, the common thread is as described above. Misery and fear were the order of the day. Ordinary South Koreans, for example, donated their gold jewellery to the government to get out of their crisis. Horrifyingly, ordinary Indonesians had to abandon rice as their staple food and eat instant noodles for carbohydrates instead as rice prices shot up beyond their means.

Policy advice: Don’t make national plans based on hot money. Ever.

Huzaime Hamid is chairman and CEO of Ingenium Advisors, Malaysia’s financial macroeconomics think tank

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