Impact of the Asian financial crisis on Malaysia

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

1.0INTRODUCTION

Asian Financial Crisis from 1997-98 was originating from Thailand, it’s like a domino effects struck one country after another country in a short period, and Malaysia being the later victims in this financial storm. In early in July 1997, floating of the Thai baht has sparked the financial; at the same time, first look at Malaysia economy system would have hardly brought up doubt that it would yield to a Thai-like financial crisis. The common performance signs of Malaysia economy system were very beneficial. Prior to 1997 financial crisis, Malaysia's macroeconomic during 1988-1996 has indicators faultless. In 1995 the average economic growth rate was 9%, and Malaysia's economic growth rate was 9.8%, after in 1996 it has up to 10%. Inflation rate was only 3.5%, and the unemployment rate was 2.5%. Besides that, in 1987 the GDP per capita was $ 1,810 in but it has increased $ 3,890 in 1995 (Malaysian Economy in Three Crises, 2010).

July 1997, the Thai first encounter financial turmoil, financial systems crumble. Financial crisis like the plague quickly spread to Malaysia. Colombo stock index plunged more than. In the turmoil, the Colombo stock index from the highest recorded February 26, 1997 of 1278 points, the same as seeing freefall below 1,000-point mark, and fell below 900 points, 800 points, and 700 points, in March 21 is only 512 points. Within nine months fallen by 76%. Malaysian Currency (Ringgit) against the US dollar from 2.48 in March 1997, to July fell to 2.57 by the end had fallen to 3.77, on the New Year period, but below the 4.0: 1 mark, in January 9, 1998 to 4.68: 1. Fell more than 46 percent (E. Charette, n.d.). In order to protect the exchange rate, the central bank had to intervene in Malaysia, the country's foreign exchange reserves and the use of a record-breaking increase in lending rates. In July 1997, the overnight bank lending rate and the seven days of the lending rate rose to 50% and 35%. However, it did not stop the ringgit exchange rate fell. By the end of 1997, the KLSE composite share price had fallen over 50% from pre-crisis level and wiping off nearly $225 billion of the share values. Nevertheless, in this worse financial situation, Malaysia government were able to ‘muddle through’ didn’t turn immediately to IMF like how Thailand and Indonesia do.

In August 1998, the most economy are in recession. The first two quarters has shown that the output of contraction respectively by 2.8 percent and 6.8 percent. In 1997, the number of retrenchments in domestic manufacturing it has only19 thousand but in 1998 it has jumped to above 83 thousand. In 1996 the unemployment rate was 2.6% but in 1998 it has rose 3.9%. The inflation rate was recorded at 6.2 percent in June, but in 1991 it was surpassing recorded as 5.3 percent (Sam, 2012).

Recovery

In my opinion, Malaysia government response to the Asian financial crisis measures are basically two directions, one is financial regulation and governance and second is expansionary fiscal and monetary policies. From the implementation perspective, both for crisis management played a relevant role in stabilizing the economic situation, but the recovery of its economy even after restructuring did not play a catalytic role in this sense, the crisis has its Countermeasures significant limitations.

Capital controls to curb the rapid capital flight, in conjunction with other control measures for the financial system to restore stability to the financial crisis and disorder, but the side effects of its inhibition of foreign investment is also very obvious. On the one hand it directly to make a sharp decline in foreign investment; 1998 Malaysia to attract foreign direct investment for $ 2.7 billion, when deregulation of foreign direct investment in 2001, only $ 290 million. On the other hand, control of the impact of foreign investor confidence and longer, although increased foreign investment, but in 2004 only reached $ 2.56 billion after its cancellation, yet over the bottom of the level of the financial crisis (E. Charette, n.d.). Because foreign direct investment can often lead to a corresponding supporting domestic investment or follow-up investment, the negative impact of foreign investment on the horse hesitant to drop the extent of foreign investment will be far more than itself. This is also an important reason for Malaysia in the post-crisis recovery period, but the investment rate has been low.

In the financial management process, a large number of financial institutions and financial assets were merged, reorganization, greatly reducing the non-performing assets in the financial system, improve the Malaysia’s financial system like the quality; but from the overall governance of direction, to truly improve the stability of the financial system, or to improve the stability of the possibility, as it should be tested in the financial shocks. The financial system should promote the fundamental role of investment and financing has not been increased in recent years, Malaysia's domestic savings rate above 40%, but the investment rate has been lower than the savings rate is about 20 percent, which also indirectly shows the gap between the financial systems in the promotion of investment.

2.0 CAUSES OF ASIAN FINANCIAL CRISIS

One of the causes of financial crisis is the financial crisis early warning indicators. Apparently, in behind of a variety of macroeconomic statistics may also lurking financial crisis. Some economists advocate the establishment of an early warning system of financial crisis, to receive and warm as soon as possible. Whom they established various mathematical models, trying to detect changes in the macroeconomic data of the financial crisis trends. These attempts are very important and very meaningful. In fact, the main reason of Malaysia leading to the financial crisis which is the bubble economy. Therefore, in the financial crisis early warning system, certain factors should bubble economy included, which there has 5 major financial risk indicators should have be consider which are, the stability of the currency, the exchange rate risk of danger index, foreign debt and the risk of non-performing assets and other dangerous values. In fact these five indicators are close contact with each other. Which is a measure of the risk of the stock market index is an important indicator of the bubble economy. Unfortunately, Malaysia has ignored all those major.

Besides that, is the bubble economy; Malaysia and other Asian countries affected by the financial crisis, the international speculative group detonated a crisis, but the underlying causes of the crisis is the mechanism itself. The most important is the government's industrial policy mistakes of the bubble economy and the financial system is not perfect cause to the emergence(colombo, 2013). By the 1980s, Malaysia seclusion, economic backwardness, tariffs and policy rules are not conducive to export, import of consumer goods in favour. At that time, textiles and electronic products accounted for almost 95% of imports (Zakaria et al., 2010). 80 years after Mahathir led Government's industrialization program (Industrial Master Plan), to encourage private and foreign investment in the designated 12 priority development of the industrial sector is expected to fully achieve industrialization in 2020. Among the 12 priority to the development of the industrial sector, there are seven resource industries, such as rubber and palm oil; 5 non-resource industries such as electronics, textiles and clothing processing. Malaysian government tried through vertical integration of downstream products, rationalization of industrial structure. In order to work this plan out, the Malaysian government has adopted a series of policies, such as direct financial support, preferential fiscal policy, low interest loans, export incentives; tax breaks reinvestment fund technical training and development studies to support these industries.

In addition, in the 1990s, Malaysia's domestic income and consumption levels continue to rise; investment demand is high, particularly strong import demand. Due to Malaysia has sufficient funds, a large number of imported machinery and equipment, raw materials and luxury goods. Although Malaysia's exports continued to grow, but imports increased even faster, resulting in a trade deficit year after year. Electronic and electrical industry is leading the development of the Malaysian economy; most companies are European, American and Japanese subsidiaries. The international market for large semiconductor and demand, prices, severely affected the export of Malaysia. Through the efforts of the Government of Malaysia adjustment, the foreign trade deficit fell in 1996 to 13 billion ringgit, still accounts for 5.5% of GNP. In 1997, the trade deficit is rise to 14.3 billion ringgit. Since 1990, the current account deficit in the balance sheet has been showed in Malaysia. In fact, the savings rate did not decline, but the investment rate rose too quickly. The Investment share of GDP even more than 45% in 1995 to 97 years. After 1994, a large number of foreign capital inflows, Malaysia, to cover up the seriousness of the current account deficit. Current account deficit in net international reserves increased from 1992 to 1993, 10% to 12%, quickly rose to 22% in 1994 and 34% in 1995. Since 1995, despite the current account deficit, the real exchange rate is still declining; it shows that before the 1997 crisis, the ringgit currency has been too high. Although many analysts expressed concern about the presence of the deficit, the ringgit currency relative to the US dollar, or increased. When the crisis broke out in 1997, the ringgit currency increased by 15 to 20% over the period from 1994 to 1995 (Hasan, 2002). Obviously, the ringgit overvaluation makes trade more disadvantaged position in Malaysia trend. High income in the stock market and real estate speculation has changing values and expectations of many people for the future. Wage growth rate is higher than the growth rate of productivity. Savings rate is lower than investment. Due to a large number of infrastructure and manufacturing launched and upstart role model makes abundant labour resources, Malaysia has been a shortage of common labour strange phenomenon. In 1997, there has more than 200 million foreign workers working in Malaysia. Rapidly rising domestic consumption, demand increased inflationary pressure. The rapid growth of consumer leads from another angle continuously increasing trade deficit (Garay, 2003).

3.0WAYS TO AVOID ASIAN FINANCIAL CRISIS

Recipient country policies

In my opinion, to avoid crises, a country needs strong financial system and sound macroeconomic policies. The function of a sound macroeconomic policy framework is that one keeping growth by keeping small budget deficit, sustainable current account and low inflation. An official matter of debt characteristics, the durability of the current consideration relies on the economy’s growth of development and the real interest amount at which the country can be lend; but in another sense, of the ability to hold up against bumps, and that is less vulnerable to the analysis (s.posen, 2015). In any case, large present consideration deficits depending on the amount of development of the economic system, in the range of 5-8 percent of GDP, and certainly any higher. The first thing to defence is fiscal policy, after that is to increase the flexibility of the exchange rate. Besides that, the policy should have strengthen financial system by improving prudential and supervision standards; ensuring that banks meet capital requirements, limit connected lend, provision bad loans, publish informative and accurate financial information and also insolvent institution are dealt with rapidly (Helbling, 2013).

The Role of the IMF

IMF playing a important role when financial crisis as it stabilizing the international financial system through prevention and also crisis mitigation. Besides that, IMF has technical assistance, contribute of prevention crises, surveillance and information provision. IMF lending in support of any country by adjustment program and contributes to the mitigation of financial crises. To surveillance actions, the IMF provides technological assistance to states members for to enhance various factors of their financial systems, such as the tax system, financial system, exchange rate system and monetary system. Through IMF comprehensive research, have enhance the potential of the marketplaces to function effectively. One of the reasons of the IMF set out in the first Content of Contract is "To give assurance to associates by making the common sources of the fund momentarily available to them under appropriate safety actions, thus offering them with probability to appropriate maladjustments in their stability of expenses without using actions dangerous of nationwide or worldwide prosperity". The Fund which that is the worldwide community it has proven its desire to act in this way in many downturns. The Fund will keep act according to its reasons, and to offer funding, with the conditionality that provides the safety actions, to nations experienced with the need to take activities to control the dangerous results of an exterior crisis (Fischer, n.d.).

A Fiscal Stimulus Package

To turn the economy around, the mortgage and banking systems need to be thoroughly restarted and reorganized (Soros, 2009). We should have used different combinations of the government spending and also tax cuts in order to boost the sagging economies.

Risk Management

One of the likely benefits of these problems will be greater admiration for risk management, both by traders and managers. Many CEOs have taken the fall for their firms’ inadequate activities. While professionals have an interest in preventing large failures later on, eventually they are agents of traders, and also motivation for risk control should come from this dissipate team. More considerately developed, investor accepted pay offers that integrate risk-adjusted efficiency actions can deliver important information to company management about the risk level with which they are afford and comfortable (Ashby, 2011).

4.0 CONCLUSION

In conclusion, Malaysia had been hit through 1997 financial crisis and it hasn’t fully recovery as strong as before. Currently Malaysia facing currency crisis, the current ringgit has fell 2.4% to RM3.43 per US dollar (Free Malaysia Today, 2014). The largest decline was mainly due to market concerns about the US this month will begin to narrow quantitative easing, to accelerate the withdrawal of foreign material. In my opinion, Government should have measures to strengthen the current account items; it will be able to boost the ringgit. The projects under the Economic Transformation Programme will be able to boost economic growth. Government measures to reduce the entrance will ensure that trade accounts deficit, but also to maintain foreign exchange reserves at a healthy level.

References

Ashby, S. (2011). Risk Management and the Global Banking Crisis: Lessons for Insurance Solvency Regulation.The Geneva Papers on Risk and Insurance Issues and Practice, 36(3), pp.330-347.

Top of Form

Bottom of Form

E. Charette, D. (n.d.). Crisis, Recovery, and the Road Ahead.Malaysia in the Global Economy. [online] Available at: http://dai.com/sites/default/files/pubs/other/Malaysia_in_the_Global_Economy.pdf [Accessed 19 Jan. 2015].

Top of Form

Bottom of Form

Fischer, S. (n.d.).How to Avoid International Financial Crises and the Role of the International Monetary Fund--Stanley Fischer. [online] Imf.org. Available at: https://www.imf.org/external/np/speeches/1997/101497.htm [Accessed 24 Jan. 2015].

Top of Form

Bottom of Form

Free Malaysia Today, (2014). Ringgit slump worst since 1997 Asian financial crisis - See more at: http://www.freemalaysiatoday.com/category/nation/2014/12/01/ringgit-slump-worst-since-1997-asian-financial-crisis/#sthash.wtUeh9N4.dpuf. [online] Available at: http://www.freemalaysiatoday.com/category/nation/2014/12/01/ringgit-slump-worst-since-1997-asian-financial-crisis/ [Accessed 26 Jan. 2015].

Top of Form

Bottom of Form

Garay, U. (2003).The Asian Financial Crisis of 1997 - 1998. [online] Westga.edu. Available at: http://www.westga.edu/~bquest/2003/asian.htm [Accessed 26 Jan. 2015].

Top of Form

Bottom of Form

hasan, z. (2002). THE 1997-98 FINANCIAL CRISIS IN MALAYSIA: CAUSES, RESPONSE, AND RESULTS.Islamic Economic Studies, [online] 9(2). Available at: http://www.irti.org/English/Research/Documents/IES/109.pdf [Accessed 18 Jan. 2015].

Top of Form

Bottom of Form

Helbling, T. (2013).IMF Survey : Policy Actions Improve Prospects for Global Economy. [online] Imf.org. Available at: http://www.imf.org/external/pubs/ft/survey/so/2013/RES041613A.htm [Accessed 23 Jan. 2015].

Top of Form

Bottom of Form

Malaysian Economy in Three Crises. (2010). Working Papers in Trade and Development. [online] Available at: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2010/wp_econ_2010_12.pdf [Accessed 19 Jan. 2015].

s.posen, A. (2015).Presentation: A Strategy to Prevent Future Crises: Safely Shrink the Banking Sector. [online] Iie.com. Available at: http://www.iie.com/publications/papers/paper.cfm?ResearchID=413 [Accessed 18 Jan. 2015].

Top of Form

Bottom of Form

Sam, C. (2012).Asian Financial Crisis Lessons, Can Malaysia’s Capital Controls be Copied? :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website. [online] Marketoracle.co.uk. Available at: http://www.marketoracle.co.uk/Article36697.html [Accessed 28 Jan. 2015].

Soros, G. (2009).A Plan for Economic Recovery. [online] The Huffington Post. Available at: http://www.huffingtonpost.com/george-soros/a-plan-for-economic-recov_b_166518.html [Accessed 23 Jan. 2015].

Top of Form

Bottom of Form

Zakaria, Z., Hj Hussin, Z., Noordin, N. and Mohamed Sawal, M. (2010). Causes, Impacts and Recovery Plans.Financial Crisis of 1997/1998 in Malaysia, [online] 5(1). Available at: http://kedah.uitm.edu.my/v2/images/stories/industrial_linkages/uitm_press/voa_5_1_2010/5_1_2010_9.pdf [Accessed 19 Jan. 2015].

Colombo, j. (2013). Malaise Is Ahead For Malaysia's Bubble Economy. [online] Forbes. Available at: http://www.forbes.com/sites/jessecolombo/2013/10/15/malaise-is-ahead-for-malaysias-bubble-economy/ [Accessed 29 Jan. 2015].

1

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.