The impact of Ringgit loans on economic growth and sustainability

The rapid growth of data centers in Malaysia has sparked debate about their economic impact and funding sources. As major tech companies like Amazon, Google and Microsoft develop data centers in the country, questions arise about whether these investments are truly benefiting the Malaysian economy or potentially draining resources. This article examines the complex issue of ringgit loans for data centers and their implications for Malaysia's financial landscape.

The Data Center Boom in Malaysia

Malaysia is experiencing a surge in data center development, with major investments pouring in from Silicon Valley giants. However, recent findings reveal that many of these projects are being funded through local ringgit borrowings rather than foreign capital inflows.

According to recent announcements, Malayan Banking Bhd (Maybank) has secured deals worth up to RM2 billion for data center financing, with another RM1 billion in the pipeline. Similarly, CIMB Group Holdings Bhd has extended approximately RM500 million in loans for data center construction, with plans for an additional RM5 billion.

Economic Implications of Local Borrowing

The use of ringgit loans for data center development has sparked debate among economists about its impact on Malaysia's economy and fiscal position. Some experts argue that local borrowing makes financial sense for foreign investors, while others express concerns about potential drawbacks.

Dr. Yeah Kim Leng, Professor of Economics at Sunway University and Finance Ministry adviser, explains the rationale behind local borrowing:

"Besides benefitting from cheaper debt compared to equity costs, the ringgit borrowings can be matched to payments for construction and other services procured in Malaysia, thereby avoiding currency and maturity mismatches."

However, Yeah acknowledges that foreign capital inflows would provide greater benefits by boosting foreign reserves and ringgit demand.

Potential Benefits of Data Center Investments

Proponents of data center investments highlight several potential advantages for Malaysia:

• Increased bank credit flow
• Employment generation
• Business opportunities for local suppliers and service providers
• Long-term economic spillover effects

Carmelo Ferlito, Chief Executive at Centre for Market Education, supports the use of local borrowing:

"The loaned ringgit will be reinjected into the economy. Adding foreign currency in the middle of the transaction will only add on costs to the operations."

Concerns and Criticisms

Critics argue that relying on local funds for data center investments may have negative consequences:

• Reduced availability of funds for domestic direct investment
• Potential crowding out effect on local borrowers
• Limited job creation compared to other industries
• High electricity and water consumption

Professor Geoffrey Williams offers a contrasting perspective:

"For every US dollar of new FDI, about US$3 of profits are being taken out... The investments are from big names but actually the number of jobs created are relatively small compared with the two million people, mostly graduates, who are underemployed."

Impact on Government Revenue and Fiscal Position

The effect of data center investments on Malaysia's fiscal position is a subject of debate. Yeah suggests that the impact on government revenue is indirect:

"A 1% increase in economic output as measured by gross domestic product is associated with a 0.94% increase in government tax revenue."

However, Ferlito cautions against viewing foreign direct investments solely through the lens of fiscal benefits:

"Helping government revenue is a consequence, which, while important, is a resultant effect. Looking at FDIs as mainly a source for fiscal benefits would mean embracing too narrow a perspective."

Balancing Growth and Sustainability

As Malaysia continues to attract data center investments, policymakers must carefully weigh the potential benefits against long-term sustainability concerns. The high energy and water demands of data centers could strain local resources and potentially conflict with the country's environmental goals.

Williams warns:

"There are also concerns about electricity and water demand from data centres which will be considerable and may put pressure on supply, causing prices to rise for the general population."

The issue of ringgit loans for data centers in Malaysia presents a complex set of challenges and opportunities. While these investments may contribute to economic growth and technological advancement, careful consideration must be given to their long-term impact on the country's financial stability, resource allocation, and sustainable development goals.

As Malaysia navigates this data center boom, striking a balance between attracting foreign investment and safeguarding local interests will be crucial. Policymakers, economists, and industry leaders must collaborate to ensure that the growth of the data center sector aligns with the country's broader economic and environmental objectives.