How External Debts affect Economic Growth in Malaysia

Yeng, Kah Yi (2018) How External Debts affect Economic Growth in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

It cannot be denied that external debts have become increasingly important for Malaysia’s development. Yet, the debts crisis happened around the world have raised the awareness of the people from all walks of life on whether the external debts accumulation would affect our country and become burdens to the future generation. Therefore, this research is aims to investigate the impact of external debts on economic growth of Malaysia using quarterly data spanning from Q1 1996 to Q4 2016. Moreover, we are also investigating the impact of other variables on the economic growth in this research. The specific objective were: to determine the long run relationship and short run causality between each variable (external debts, exchange rate & trade openness) and Malaysia economic growth. After ensuring all the variables are stationary by using Unit Root test, the Johansen Juselius cointegration test are used to test whether the variables are cointegrated with each other. Then, applied the Vector Error Correction Model (VECM) when the model are cointegrated, follow by the Granger Causality test to identify the existence of causality between the variables. From the results, it is evident that there are long run equilibrium relationship between GDP, external debts, exchange rate and trade openness in Malaysia. It simply indicates the variables are the important segments that can improve Malaysia’s economic growth. There is also existence of short run causality linkages between the external debt and the macroeconomic indicators with GDP. The findings from the study recommend the policy makers should involve in managing the level of external debt, especially ensure the accumulation of external debt would not trigger a debt crisis to happen in our country.