Determinants and Transmission Channel of External Debt: Evidence from Malaysia

Malaysia’s external debt has been on an increase, which has become a national concern. Data used for this study was from 1970 to 2013. The VECM results showed that external debt had no transitory but a permanent relationship with the determinant variables. Exchange rate, recurrent and capital expenditures all posted a positive longrun relationship while GDP had a negative relationship with external debt. Granger causality test was conducted to determine the direction of causation between the variables. The results indicate that only capital expenditure had a unidirectional causality effect on external debt and the transmission channel showed that GDP impacts external debt through its impact on capital expenditure. This validates the claim that in the longrun Malaysia has been able to tie its external debts to capital projects which is desirable.