The hot news in the last few weeks has been a report from a foreign research house that highlighted Malaysia's huge decline in external reserves.

By focusing on "implied" net capital flows based on the value of foreign reserves and current account surplus, the report alleges that a bizarre phenomenon of huge capital outflows from the Malaysian shore has occurred.  

Panic ensued among some journalists, leading them to question whether the country is experiencing a phenomenon known as "capital flight".

Now, hold your horses, lie back and take a deep breath, I told one of the reporters who called on this issue. Before we get unnecessarily jumpy over the report, let us get certain things in perspective.  

First, let us recap the components of a country's balance of payments (BoP) — the current account and the capital & financial account.   

Current account summarises trade transactions, showing the size of the country's exports and imports, investment incomes and transfers. The other component, the capital & financial account, has three sub-components: direct investments, portfolio investments and other investments.   

The crux of the argument is related to the capital & financial account; specifically what lies behind the negative number.

It is worth noting that one of the reasons for the leakages was the net outflow of direct investment item in the BoP which was partly attributed to the so-called reverse investment — investments made by Malaysian companies abroad.

Of late, investments by Malaysian entities abroad have been on the rising trend as companies sought to diversify their revenue base and take advantage of an increasingly globalised economy.

The booming economies of India, China, Vietnam and the Middle Eastern countries are currently the favourite investment destinations for Malaysian companies and massive amount of money has been flowing to these countries in search of good investment opportunities.   

This is a positive development as it encourages local talents to venture out and compete to be at par with other global players in terms of their services and products they can offer. The repatriation of profits from their operations will eventually add to the reserves of the country. So, there is no problem there.  

Scrutinising the component in the BoP, one can see that the amount of direct investment abroad had jumped to RM11.6 billion in 2005 from an average of RM5.8 billion per annum between 2000 and 2004.   

By 2006, the amount doubled to RM22.1 billion and by 2008, the value skyrocketed to RM50.2 billion. It is true that some direct investments by foreign companies in the country have moved away to lower-cost countries like China and India.   

However, one should not ignore the fact that Malaysian companies had also aggressively ventured into other parts of the world in recent years.

From the BoP account, one can also see that investments into Malaysia remained fairly stable, of between RM22 billion and RM29 billion per annum from 2006 to 2008.  

But because of the huge increase in the amount of direct investment abroad compared with the amount of direct investment in Malaysia, the balance between these two components has turned negative — meaning that outflows have surpassed the inflows in recent years. So this explains part of the story.

Another aspect is related to the outflows of short-term capital (portfolio outflows).  Due to the severity of the global financial crisis that started in late 2008, portfolio investment recorded a net outflow of about RM133 billion between the second quarter of 2008 and the second quarter of 2009.

For the whole of 2008, net outflow in the portfolio investment amounted to RM84.4 billion, compared with a net inflow of RM18.4 billion in 2007.  

This is understandable as investors fled the domestic financial market for safe-haven instruments in developed countries like the US.  However, as the crisis subsided, Malaysia's portfolio flows have turned positive, registering a net inflow of RM18.6 billion in the third quarter of 2009.

There is of course an argument that foreign direct investment is shying away from Malaysia.  A recent World Bank report indicated that the ranking for the ease of doing business in Malaysia declined to 23rd in 2010 from 21st the year earlier.  

Last year, another report on global competitiveness cited that the measure for "institutional framework" slipped to 43rd from 17th position within two years.   

Yes, Malaysia needs to work on that by making it easier for foreign investors to do business here. In this regard, one has to applaud PEMUDAH, an agency which was established to enhance the ease of doing business in Malaysia.   

So, is there really any justification over the brouhaha of capital flight?  One effective way to gauge the validity of this argument besides looking at the error and omission item in the BoP is to look at the reaction in the financial market.   

For instance, looking at the movement of the ringgit, one can hardly conclude of any massive outflow of capital from the Malaysian shore. The ringgit has strengthened from RM3.59 per US dollar in July 2009 to RM3.34 per US dollar recently before weakening slightly in recent weeks.  

This is in stark contrast to the situation during the height of the Asian financial crisis in 1998 when the ringgit succumbed from the RM2.55 per US dollar level to way above RM3 per US dollar within a short-time frame.  

Secondly, the equity market has rebounded strongly from its lowest level in October 2008, up by almost 52% by mid-January this year, causing the portfolio flow to register a positive balance of RM18.6 billion in the third quarter of 2009.  

So, to answer the person who called me about the issue of capital flight, I'd say — "I would not lose my sleep over it".

Nor Zahidi is the chief economist of Malaysian Rating Corporation Bhd (MARC).