Asian Financial Crisis: Malaysia

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Introduction

The Asian financial crisis started in July 1997 in Thailand. During this time the financial institutions continuously incurred huge loss and as a result, some institutions were faced out of the market. The crises were mainly attributed to the banking panics which consequently led to the economic recession in the region. The stock market crashes and currency crisis and the bursting of the financial bubbles also significantly contributed to the 1997 financial crisis in the Asian region. Slightly before this period, the Asian countries were able to maintain high-interest rates which attracted foreign investors into the region. This was mostly so in the Southeast Asian countries.

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By then, the region had a lot of capital inflows which led to some dramatic rise in asset prices in the region. Indeed, the region’s economies had reported considerable growth. It was estimated that they reported growth rates of between 8-12% annually which was a commendable rate by then. Among the countries which reported such growths includes Malaysia, South Korea, Thailand, and Singapore. This essay seeks to analyze the 1997 Asian financial crisis in Malaysia.

How did the crisis begin

Many scholars have argued differently on the cause of the financial crisis in Asia. However, according to Ravenhill (4), the crisis was escalated by the Thailand government’s decision to break the long-standing exchange rate between the local and the internationally recognized currency such as the dollar. By then, the Thailand economy had greatly increased to a point of being referred to as the “second-tier”. The economy was also referred to as one of the new Asian tigers since it had tremendously grown in the last decade.

During this period, there emerged some economic panics as the state’s currency continued to lose its value. Thailand’s government however was not quick to address the issue and this led to a massive withdrawal of capital by the local and the foreign investors as they feared incurring losses. The withdrawal impact was quite heavy for the government and as a result, it opted to allow the market to determine the value of the currency to rescue the economy. The government also sorts some financial assistance from other international governments and also from the international monetary fund.

The impacts of the Thailand financial crisis were also spread to other countries within the Asian region. For instance, the Korean economy experienced a decrease in living standards and currency value collapse (Ahn, et al 41). Companies also experienced financial difficulties a factor that led to many being declared bankrupt during the same period. The effect of the financial crisis went beyond East Asian countries to countries such as Brazil and Russia. This was so even though there was no direct link between these economies and the East Asian economies. But it is important to note that the countries within the Asian region experienced a significant economic decline as the international trade declined considerably in 1998 (Akhand & Gupta 67).

The trade and economic interdependencies between Thailand and the northeast Asia countries led to the relocation of the manufacturing industries into the South East Asian countries. This move however had occurred a decade before the financial crisis of 1997 (McGinness 5). It is, therefore, appropriate to say that the Asian countries experienced the financial crisis as they tried to rescue their neighboring nations by advancing loans and other financial assistance.

The Asian financial crisis depicted the growing importance of interdependencies in the global economy. It also explained how the economic development in one particular region can be transmitted into the other regions (Ravenhill 7). The crisis also enables us to know the vulnerability of the financial institutions due to periodic crises. The role of the international financial institutions such as the World Bank and the IMF can also be identified from the Asian financial crisis.

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The historical performances of the Malaysian economy before the crisis

The Malaysian economy had significantly risen before the 1997 financial crisis in the Asian economies. Favorable features dominated its economies before the crisis. Notably, the economy was registering an economic growth rate of 8-9% annually. Inflation and unemployment rates were also considerably low before the financial crisis. The country also registered budget surpluses in the five years to the year 1997. The government had also retained the public and external debts at a lower level. Similarly, the government was also able to maintain its debts at a serviceable rate.

According to a report compiled by the Centre for Co-operation with Non-members & Organization for Economic Co-operation and Development in the year 1999, Malaysia observed a considerably low level of debt-service ratio which was approximately 6% of its total exports. Throughout this period the private sector engineered the growth while the government provided favorable conditions for them to operate within the country. The country also had strong and healthy financial institutions which experienced very minimal losses due to the loans defaulters. The country also successfully maintained a high saving rate in the world of approximately 38%. The per capita income of the Malaysian people was considerably high and so were their living standards.

Effects of the crisis

The Malaysian economy was greatly hit by the 1997 financial crisis to an extent that its economy collapsed due to loss of confidence and withdrawal of investments by both the local and the foreign investors. According to a report compiled by Dwor-Frécaut, et al (177) there was a sudden reversal of the capital inflows which brought about a significant hick-up in the overall economy. These abrupt changes in the countries economy almost caused a stalemate in the economic progress, as the government together with the financial institutions barely had enough money to service their clients.

The large manufacturing and distribution companies were also faced with financial constraints which pushed them to fire most of their employees. The unemployment rate therefore considerably rose as the people’s standard of living declined. The Malaysian currency ringgit also greatly depreciated compared to other international currencies such as the dollar.

The continued currency depreciation led to a heightened panic in the investing activities. As a result of this many investors chose to withdraw their investments from the Malaysian market. The continued currency depreciation heavily impacted the Kuala Lumpur Stock Exchange (KLSE) since the market heavily relied on the ringgit for its daily transactions (Ping & Yean 1). Despite the many measures that the KLSE established to salvage the situation they were unable to stop the continued decline. As a result, the market panic raised considerably which further led to a huge loss to the Malaysian economy. The fall of the exchange rate and the stock market negatively impacted the Malaysian economy and these could be solely attributed to the 1997 financial crisis.

The financial constraints experienced by businesses were also translated to further loss in the financial institutions as they heavily depended on them. The foreign debt size was also inflated as the country sort financial assistance from outside to support its declining economy. The financial crisis, therefore, weakened the domestic currency, consequently causing the rise in the domestic prices and the cost of the immediate imported goods. It also exposed the country to the higher value of external debt as the financial assistance is acquired from outside. The depreciation also greatly constrained the domestic investment and worsened the prospects of economic growth in the country.

The considerable measures which enabled Malaysia to overcome the crisis

To effectively counter the crisis, Malaysia implemented some economic policies which were aimed at assisting the economy to recover. The government adopted a series of policy measures between October and December 1997. The policy measures were aimed at improving the current account deficit which had increased due to the financial crisis and to strengthen the balance of payment also deteriorated by the crisis.

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The Malaysian government also intended to improve domestic competitiveness which could consequently assist to increase monetary and financial stability within the economy. Although the Malaysian government did not seek direct assistance from the IMF, it obtained some advisory inputs from them to restore the market confidence of their local currency. Among the measures that the Malaysian government undertook included the following. First, the federal government sort to reduce its expenditure by 2% since the income had also fallen due to the crisis. It also chose to postpone its mega-projects to save itself from severe financial constraints.

The government increased its regulations towards the financial institutions by establishing prudential standards which should guide their behavior and performances. The financial institutions were also required to increase their general provisions by 1.5%. Financial disclosures were also emphasized in the banking institutions, a move that made them operate efficiently and consistently. The government also introduced a credit plan which aimed at limiting the overall credit growth within the economy. This enabled the country to attain a 15% credit growth level in 1998 compared to the 25% in 1997. The financial institutions were also limited to advance loans and financial credits only to the productive economic sectors.

Export-oriented activities were also prioritized when it came to loan issuance. To successfully cater for the internal economic stability and confidence in the financial systems the government further implemented some policies to cater for that. These policies can therefore be viewed as follow-up measures that were taken by the Malaysian government to ensure greater recovery of the economy. The policies were implemented in the year 1998 after the implementation of the first measures in 1997.

The policy measures included reducing the current account deficit to a considerable level of 3% of the total GNP. The federal government expenditure was further trimmed to 18% by the year 1998. Stricter investment rules and deferrals of the non-strategic projects were emphasized within the government. This was aimed at ensuring that the government only concentrates on viable projects. To effectively enhance growth in the domestic firm’s corporate governance was advocated in all the big and medium-sized companies.

The government also advocated for the information disclosures since this would enable them closely monitor their operations to ensure that they suit the then restructuring program. The Malaysian government did not rest at that so it proceeded further by announcing a new policy which was to govern the financial sector in February 1998. The measure aimed at raising financial soundness in the Malaysian bank’s something that improved the investor’s confidence which had earlier deteriorated. The statutory requirement was reduced to encourage the Malaysian commercial to effectively operate within the market.

To enable the banks to deal with the existing financial hardships, the government adopted measures that expressly allowed the banks to seek financial assistance immediately they sense trouble in their operations. The banks were required to adopt 20% provisions for uncollateralized loans and other financial assistance (Kovsted, Rand & Tarp 33). This was mainly aimed at ensuring that the banks do not end up incurring losses due to the repayment hardships for such loans.

The minimum risk-weighted capital ratio was also increased to position the banks better for the market. The financial companies were also allowed to increase their capital funds which greatly assisted them to acquire more cash from the local and foreign investors. The government also restricted scenarios where an individual investor could possess more than 30% of the company’s shares. This was aimed at ensuring that the public got a chance to invest in capital market investment. It also encouraged the general public to participate in the overall economic growth of the country.

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There were more rigorous monitoring processes in the financial institutions which aimed to ensure their soundness. For instance, regular stress test analysis was conducted to ensure that the banks were doing alright in the economy. The Malaysian government also sourced some financial assistance from the World Bank to cater for its social and poverty eradication projects in the economy (Centre for Co-operation with Non-members & Organization for Economic Co-operation and Development 210).

The effects of the financial crisis on the SME (Small and Medium Scale Enterprises)

It is believed that the small and medium scale enterprises in Malaysia provided more than half of the employment opportunities in the country. This was as per the report compiled by Harvie & Lee (10). According to the book, the SME did not only assist the economy to improve but also improved the balance of payment as it increased export of the domestically produced goods. The SME encountered huge financial problems such as the reduction of sales volume and profitability.

The financial crisis led to a significant decline in domestic productions and as a result, the exports were also declined. The weakening of the product prices led to a significant decline of competitiveness to the domestically produced commodities. This consequently led to a reduction in the overall product demand both within the Malaysian market and in the Asian region at large. But since the SME operations within the Asian region were directly influenced by the volatility of the currency and exchange rates in the regional economy, great support was required to reduce the hardships they were going through.

How the government intervened to rescue the SME

The measure by the Malaysian government to encourage corporate governance was intended to lower the economic risks that had been raised by the Asian financial crisis. The government also advocated that the business regularly utilize risk management strategies to ensure safety in its operations. The SMEs were also encouraged to diversify their market to reduce the risk brought about by the market concentration. The government also greatly improved the access to finance and information which greatly boosted the SME operations (Oxford Business Group 31).

The government measures intended to resolve the financial crisis greatly impacted the SME since the move somehow tried to improve the sales and cash flows within the economy. There was a consistent emphasis on the small and medium scale enterprises to ensure that they avoid, manage and diversify their risk exposure to retain their profitability. This measure saw a great improvement in their operations which also boosted the Malaysian economic recovery.

Since the Malaysian government advocated for resource mobilization in domestic production, the country was able to improve its exports production which improved the balance of payment problems (Hew, Loi & Institute of Southeast Asian Studies 27). The small and medium scale enterprises assisted the government to take care of the rising unemployment as industries were able to maintain their workforce.

The Malaysian government on the other hand provided a suitable environment that encouraged the SME to thrive well in the market. As a result, the SMEs were initiated within the economy and due to the prevailing suitable conditions, they were able to expand and attain some international standards within a short period (Harvie & Lee 152). The Malaysian government was also quick to understand that the SME would have long-term economic growth. It, therefore, went ahead and provided a better entrepreneurial environment which favored and boosted their operations. The efficient environment nurtured the newcomers and also retained the existing firms thus ensuring economic stability in the country.

Conclusion

The Asian financial crisis greatly impacted the region’s economies including the Malaysian one. The crises led to currency depreciation which increased the investor’s panic and as a result, many of them opted to withdraw their investment from the region. Many foreign and domestic manufacturing companies experienced a lot of financial hardships and to some extent, some withdrew from the market. The crises led to a significant increase in the unemployment rate as many of the companies were forced to cut their workforce expenditure. Since the majority of the Asian countries used external financial assistance the external debt was raised considerably. Different countries used different strategies to sail from the then financial crisis.

Malaysia was quick to formulate and implement viable economic policies which enabled them to effectively overcome the 1997 crisis. The continued monitoring and improvement of its policies greatly boosted the economic recovery in the country. The Malaysian government closely monitored and regulated the operations of the financial institutions which raised confidence among the investors.

Malaysia also avoided burdening itself with external financial assistance which enabled it to retain the external debt at a considerably lower level. The continued reduction of the federal government expenditure also enabled the country to save on its incomes which were consequently utilized in much more profitable projects. The country also provided improved and better environmental conditions which encouraged both the domestic and foreign manufacturing companies to prosper in its economy. The continued financial support that the government offered to the SME enabled Malaysia to overcome the balance of payment and the unemployment problems.

Works cited

Ahn, East Choong Yong., et al. Asian economic regionalism: feasibilities and challenges. Netherlands, Springer. 2005. Web.

Akhand, Hafiz & Gupta, Lal Kanhaya. Economic development in Pacific Asia. New York, Routledge. 2006. Web.

Centre for Co-operation with Non-members & Organisation for Economic Co-operation and Development. Structural aspects of the East Asian crisis, Volume 1998. New York, OECD Publishing. Web.

Dwor-Frécaut, Dominique, et al. Asian corporate recovery: findings from firm-level surveys in five countries. Washington, World Bank Publications. 2000. Web.

Harvie, Charles & Lee, Boon-Chye. Sustaining growth and performance in East Asia: the role of small and medium sized enterprises. London, Edward Elgar Publishing. 2005. Web.

Harvie, Charles & Lee, Boon-Chye. The role of SMEs in national economies in East Asia. London, Edward Elgar Publishing. 2002. Web.

Hew, Denis, Loi, Wee Nee & Institute of Southeast Asian Studies. Entrepreneurship and SMEs in Southeast Asia. Singapore, Institute of Southeast Asian Studies. 2004. Web.

Kovsted, Jens, Rand, John & Tarp, Finn. From Monobank to Commercial Banking: Financial Sector Reforms in Vietnam. Copenhagen, NIAS Press. 2005. Web.

McGinness, Alexis. “The Human Face of the Asian Financial Crisis in Malaysia and Indonesia.” The Human Face of the Asian Financial Crisis. N.d. Web.

Oxford Business Group. The Report: Malaysia 2009. New York, Oxford Business Group. 2009. Web.

Ping, Lee Poh & Yean, Tham Siew. “Malaysia Ten Years after the Asian Financial Crisis.” Malaysia Ten Years after the Asian Financial Crisis. N.d. Web.

Ravenhill, John. Global Political Economy. New York, Oxford University Press, 2008. Web.

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