Malaysia ~ Macroeconomic and Financial Stability

Prepared for the Challenges of Globalisation Conference, Thammasat Uni ersity, !ang"o", #$%## &ctober $'''

Mohamed (riff Tiangchye Tan

_____________________________________________________ _ Malaysian )nstit*te of +conomic ,esearch

_ _____________________________________________________ _
1

Table of Contents
-ist of (bbre iations Prolog*e . / 0 1 2 2 4 4 ' ' $7 $7 $$ $. $. $/ $0 $1 #7 #0 .7 .#

I II

The Malaysian Economy Prior to the Crisis Macroeconomic Concerns and Underlying Weaknesses
II.1 II.2 II.3 II.4 II.5 II. II.! II." (n & erheating +conomy +rosion in +3port Competiti eness ,eso*rce Misallocation and -oss of +fficiency +3cessi e Credit +3pansion and 5i ersion of ,eso*rces to 6on%Prod*cti e Sectors +scalating Sa ings%)n estment Gap and C*rrent (cco*nt 5eficit -iberalisation -ac" of )nstit*tional )nfrastr*ct*re and 5eficient Go ernance 8igh 5ebt%+9*ity ,atios

III I%

The Im#act on the $eal Economy &ta'ilising Meas(res and $eco)ery E**orts
I%.1 I%.2 I%.3 I%.4 I%.5 The )nitial Months :irt*al )MF Policies The +3pansionary Stage )ntrod*ction of Capital Controls ~ The Mo e into Contro ersy Financial and !an"ing Sector ,eforms $2

% %I

+e)elo#ments Th(s ,ar -lo'alisation. &hort/term Ca#ital and Insta'ility

+pilog*e ,eferences

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List of Abbre
BCI BLR BNM BOP CDRC CPI !P" !RM !&CL "DI 'DP 'NP ICOR IM" (L&! M)PI MI!R NB!R N!*C N!RP NICs NPL PPI R-CR ."P -.O

iations

Business Confidence Index Base Lending Rate Bank Negara Malaysia Balance of Payments Corporate De t Restructuring Committee Consumer Price Index !mployees# Pro$ident "und !xc%ange Rate Mec%anism !xc%angea le &u ordinated Capital Loans "oreign Direct In$estment 'ross Domestic Product 'ross National Product Incremental Capital Output Ratio International Monetary "und (uala Lumpur &tock !xc%ange Malaysian )ouse Price Index Malaysian Institute of !conomic Researc% National Bureau of !conomic Researc% National !conomic *ction Council National !conomic Reco$ery Plan Ne+ly Industrialising Countries Non,Performing Loan Producer Price Index Risk,-eig%ted Capital Ratio .otal "actor Producti$ity -orld .rade Organisation

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Prologue

.%e financial maelstrom t%at descended upon !ast *sia follo+ing t%e collapse of t%e .%ai a%t in /uly 0112 +ill3 for a long time3 e seen as a defining c%apter in *sia#s economic %istory4 Occuring at a time +%en macroeconomic fundamentals of t%e region#s economies seem sound and %ealt%y3 t%e crisis itself and t%e ensuing policy de ates c%allenged international economists3 putting t%em to task in identifying t%e causes e%ind it all4 In fact3 in its aftermat%3 t%ere +as little agreement on %o+ to c%aracterise t%e crisis4 Certain economists see it as a alance of payments crisis3 considering t%e deficits sustained y most of t%e affected economies3 +%ile ot%ers maintained t%at it +as essentially a currency crisis4 !$entually3 in t%e eyes of many3 it egan to e seen as t%e darker side of glo alisation4 In all3 one of t%e most important and c%allenging tasks in its +ake +as to restore and maintain macroeconomic and financial sta ility3 t%is eing rendered e$en more precarious in a climate of $olatility4 -%at egan as a currency crisis %as rapidly de$ol$ed into a financial3 economic and political crisis in many cases4 .%e unprecedented turmoil and insta ility t%at follo+ed su se5uently ga$e rise to $arious 5uestions on t%e effecti$eness of macroeconomic policies and go$ernance in t%e region4 .%e raging de ate o$er !ast *sia#s 6economic model7 t%at roug%t years of p%enomenal gro+t% to t%e region su sided4 .%e cry of t%e 6triump%7 of *sian $alues o$er -estern practices dissipated to naug%t4 In its aftermat%3 Malaysia#s immediate concerns +ere t%ose of sta ilising financial markets3 restoring in$estor confidence and strengt%ening t%e resilience of t%e economy to potential systemic risks arising from contagion effects4 .%e initial focus of macroeconomic management +as t%us along t%ese lines4 .%e measures and policy packages Malaysia implemented3 %o+e$er3 e$ol$ed +it% t%e c%anging circumstances during t%e course of t%e crisis4 .%e Malaysian economy +as in recession in 0118 ut t%e situation %as turned for t%e etter and t%e economy is gradually reco$ering4 .o a certain extent3 t%is upturn may e attri uted to measures undertaken y t%e go$ernment4 Ne$ert%eless3 t%e regional turnaround %as played a part and %as contri uted to a rene+ed spirit t%at reco$ery on a regional scale is under+ay4 .%e main t%rust of t%is paper is on t%e macroeconomic sta ilisation measures and reco$ery efforts undertaken y Malaysia to deal +it% t%e crisis4 In lig%t of t%e de ate on glo alisation since t%e onslaug%t of t%e crisis3 and in con9unction +it% t%e t%eme of t%e conference3 +e %a$e included a related section on t%is t%eme in our paper4 .%e paper asserts t%at t%ere +ere indeed structural +eaknesses in t%e system3 calling into 5uestion t%e sustaina ility of Malaysia#s %ig% gro+t% strategy4 It +ill open +it% an o$er$ie+ of t%e macroeconomic situation in Malaysia in t%e period preceding t%e crisis efore proceeding to look at de$elopments during t%e crisis period4 In doing so3 t%e paper +ill discuss and analyse policy pronouncements leading to t%e present situation4 .%e final section +ill

riefly comment on t%e muc% de ated topic of capital mo ility and glo alisation in relation to economic sta ility and t%e crisis4

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The Malaysian Economy Prior to the Crisis

eing an essentially agrarian economy dependent on a fe+ primary products to ecome a full,fledged

In t%e four decades since independence3 Malaysia successfully under+ent a transformation from manufacture, ased economy3 s%ifting to+ards t%e %ig%,tec%nology end of industry4 )istorically3 Malaysia#s macroeconomic management %as al+ays een considered to e sound y any standards4 .%ere %a$e een considera le fiscal discipline and monetary policy prudence4 *t t%e same time3 Bank Negara +as a le to maintain financial sta ility y successfully sterilising s%ort,term capital flo+s4 Du ed as one of !ast *sia#s 6star economies73 Malaysia#s gro+t% a$eraged 841 per cent et+een 0188 and 011: +%ile successfully maintaining a lo+ inflation rate of approximately ;,< per cent per annum o$er t%e period4 *t t%e same time3 Malaysia %as one of t%e %ig%est sa$ings rates in t%e +orld at ;8,<= per cent of %er 'DP4 .%e rate of unemployment %as generally remained relati$ely sta le and lo+ o$er t%e past t%ree decades +it% t%e only exception eing during t%e recession of t%e mid, 018=s +%en it reac%ed a record 84; per cent in 018:4 By 011:3 t%e unemployment rate %ad dropped to a mere >4? per cent4 In comparison +it% ot%er !ast *sian economies affected y t%e crisis3 Malaysia %ad a relati$ely lo+ le$el of external de t of @&A<?4> illion or <> per cent of %er 'DP as at /une 0112 +%ile %er de t ser$ice ratio +as maintained at a managea le ?4? per cent3 and t%e s%ort, term component of t%e total de t amounted to ;040 per cent4 .%e economy %ad also een posting udget surpluses for fi$e years consecuti$ely since 011;4 On t%e +%ole3 alt%oug% t%e Malaysian economy experienced a moderation in gro+t% to 84: per cent in 011: compared +it% t%e ro ust figure of 14? per cent in 011?3 t%e rate +as still considered in retrospect too %ig%4 &imultaneously3 t%e external position of t%e economy impro$ed significantly due to a muc% lo+er gro+t% in imports o$er t%e same period4 .%e merc%andise trade alance registered a muc% %ig%er surplus of RM84: illion in 011: compared to t%e 011? figure of 9ust RM>;; million +%ile t%e current account deficit narro+ed considera ly in 011: to ,RM0; illion from t%e pre$ious year#s figure of ,RM0842 illion as a result of a slig%tly impro$ed ser$ices alance +%ic% recorded a lo+er deficit t%at year4 In terms of nominal 'NP3 t%is amounted to ,?4? per cent in 011: as compared to t%e pre$ious year#s figure of ,14= per cent4 .%e year 0112 +as t%us us%ered in +it% muc% optimism4 -%ile t%e gro+t% rate %ad seen some moderation in 011: and +%ilst t%ere may %a$e een indications t%at t%e peak +as past3 t%ey +ere mainly o$ers%ado+ed y t%is optimism4 'ro+t% +as expected to continue to e strong and +as pro9ected at 8 per cent for t%e year4 "undamentals +ere still descri ed as good4 .%e external payments current account deficit +as expected to furt%er narro+ as a percentage of 'NP +%ile t%e pu lic sector fiscal position +as expected to e in surplus4 .%is optimism +as also pro a ly due to a strong feeling t%at ad9ustment measures initiated to address t%e existing economic im alances +ould ac%ie$e a soft landing in terms of a more sustaina le gro+t% +it% sta ility BBNM *nnual Report 0112C4

In a situation of full employment and full capacity3 concern %ad egun to mount in t%e t%ree years prior3 regarding t%e ad$erse impact of too rapid a gro+t%4 !xcess demand pressures on t%e alance of payments and t%e disproportionate expansion in ank credit3 especially loans3 to finance unproducti$e or speculati$e sectors %ad egun to raise 5uestions4 *lso3 t%ere +as intense competiti$e pressure on Malaysian exports from lo+er,cost producers3 not to mention t%e o$er$alued exc%ange rate of t%e ringgit %urting t%e country#s manufactured exports4 Remedial measures instituted since 011? to alle$iate t%e situation seemed to %a$e produced some results in terms of t%e significant impro$ement in t%e external alance as +ell as a moderation in t%e inflation rate in 011:4 "urt%er prudential measures announced in t%e eginning of 01123 t%us3 could only ser$e to en%ance confidence t%at correcti$e measures +ere in place to reduce credit and monetary gro+t% as +ell as to pre,empt rises in asset inflation BBNM *nnual Report 0112C4 .%erefore3 +%en t%e .%ai a%t +as first %it y a +a$e of speculati$e,selling in mid,May3 01123 and t%e su se5uent contagion effect +as initially felt3 Malaysians maintained a certain calm and optimism4 It +as after t%e free,floating of t%e a%t in /uly and +%en t%e ensuing effect unfolded t%at reality egan to take %old4 .%e Malaysian economy +%ic% %ad3 until early 01123 een one of t%e stellar performers of emerging !ast *sia3 egan to experience a turna out in performance4 Not+it%standing t%e acclaimed fundamentals3 t%e economy succum ed4

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II

Macroeconomic Concerns and Underlying Weaknesses

"e+ +ould actually %a$e expected at t%e onset of t%e crisis t%at t%e repercussions could %a$e een so se$ere4 .%e eginning of summer 0112 still sa+ in$estors gung,%o a out in$esting in emerging *sia4 In t%e mid,011=s3 se$eral economists in t%e -est %ad egun cautioning !ast *sia a out t%e possi ility of t%e 6 u le ursting74 La+rence /4 Lau of &tanford BLau D (im 011>C and *l+yn Eoung of Boston @ni$ersity BEoung 011;3 011<C %ad3 t%roug% t%eir researc%3 commented t%at !ast *sia#s gro+t% %ad more een 6a matter of perspiration t%an one of inspiration74 *t a out t%e same time3 Paul (rugman pu lis%ed an article in "oreign *ffairs B(rugman 011<C on a similar t%eme4 Ne$ert%eless3 +%en t%e going +as still good3 %o+ many actually took %eed of Facademic# t%eories of a similar genreG *midst t%e confusion in t%e +ake of t%e crisis3 t%e Malaysian Prime Minister Dr4 Ma%at%ir Mo%amad criticised international currency speculators for eing t%e ones +%o precipitated t%e !ast *sian crisis4 .rue3 to a certain extent3 currency speculators played a predatory role in t%e e$ent4 @nfortunately3 in$estors often tended to percei$e t%at all countries and economies in t%e region are identical4 )erd e%a$iour dri$en y panic and %ysteria led to t%e +%olesale pullout of funds from t%e region4 .%us3 t%e speculati$e attack on t%e .%ai a%t amidst concerns of a slo+do+n in exports3 %ig% s%ort,term external de t position3 o$er$aluation of t%e currency and t%e decline in asset prices led to t%e elief t%at similar risks +ere present in ot%er regional economies4 .%is set t%e dominos to tum le

one y one4 Looking ack3 one must per%aps concede t%at currency speculators3 after all3 are messengers +it% a message t%at all may not e +ell at %ome B*riff 0111C4 -ere t%ere t%en3 reasons for Malaysia#s economy to e $ulnera leG .o egin +it%3 macroeconomic figures can conceal underlying +eaknesses4 !ssentially t%erefore3 contagion +as only part of t%e story4 In actual fact3 it could e clearly inferred from t%e analysis of t%e situation prior to t%e crisis t%at ot% internal as +ell as external factors played a role in ending Malaysia#s Band t%e region#sC 6miracle74

II.1.

An Overheating Economy

.%e Malaysian economy +as already o$er%eating due to t%e rapid gro+t% since t%e late 018=s4 .%is may e e$idenced y t%e persistently large alance of payments current account deficits since 011=4 By 011:3 'DP gro+t% +as a out >,; percentage points a o$e potential4 .%is exerted pressures on prices +%ic%3 in turn3 manifested itself in t%e form of +age increases a o$e t%at of producti$ity gains4 Infrastructure ottlenecks +ere experienced at many le$els in t%e economy4 .%e success of Malaysia#s de$elopment policies in creating employment %ad led t%e economy to experience se$ere la our s%ortages3 in t%e lo+er and t%e %ig%,skilled end4 'i$en Malaysia#s relati$ely small la our force coupled +it% t%e +orkers# %ig% reser$ation +age3 s%e %ad to resort to immigrant la our4 Conse5uently3 t%ere +as a large influx of immigrant +orkers estimated at >4= to >4? million B ot% legal and illegalC during t%e first %alf of t%e decade to fill t%is $acuum4

II.2

Erosion in Export Competitiveness

Malaysia#s exports egan to experience an erosion in competiti$eness partly due to rising usiness costs and partly ecause of t%e o$er$aluation of t%e ringgit4 .%e de$aluation of t%e renmin i in 011< and t%e depreciation of t%e yen %ad all eroded Malaysia#s export competiti$eness4 *t t%e same time3 t%e @& dollar %as een appreciating in t%e couple of years preceding t%e crisis4 -it% t%e ringgit and most !ast,*sian currencies 65uasi,pegged7 to t%e dollar3 t%is trend egan to undermine t%e region#s competiti$eness4

II.3

Resource Misallocation and Loss of Efficiency

Resource misallocation is often indicated y a decline in .otal "actor Producti$ity B."PC4 In Malaysia3 t%e %ig% 'DP gro+t% +as essentially input,dri$en and not producti$ity,dri$en4 .otal factor producti$ity B."PC +as eginning to plunge into negati$e territory and producti$ity could not keep up +it% increasing +ages4 ."P gro+t% a$eraged =41 per cent per year et+een 0110 and 011:4 Bet+een 0182 and 011=3 it a$eraged >41 per cent4 HIts contri ution to 'DP gro+t% declined from >842 per cent et+een 0110 and 011? to 014? per cent during 011:,0112 B-%ite Paper 0111CI4 .%is +as furt%er compounded y t%e fact t%at t%e incremental capital,output ratio BICORC +as steeply rising4 -%ile a rising ICOR may e indicati$e of large,scale infrastructure in$estments t%at %a$e yet to s%o+ its positi$e contri ution to output3 gi$en t%e declining ."P3 it +as a sign of gro+ing inefficiency in capital allocation4

II.4

Excessive Credit Expansion and Diversion of Resources to NonProductive Sectors

O$er t%e period3 t%ere +as a di$ersion of resources from t%e real sector into speculati$e acti$ities +%ile +it%in t%e real sector itself3 t%ere +as di$ersion into non,traded acti$ities suc% as t%e property sector and t%e construction of $arious mega,pro9ects4 !xcessi$e credit dis ursement y t%e anking sector to non,producti$e sectors defined to include t%e road property sector3 consumption credit3 and loans for t%e purc%ase of stocks and s%ares ecame a ma9or cause for concern4 Bet+een 011> and 011<3 loans +ere gro+ing at an a$erage rate of 0>4> per cent ut y 011?3 t%e rate %ad risen dramatically to >84: per cent4 In 011:3 it eased slig%tly to >:42 per cent ut in early 0112 it %ad increased again to reac% a +orrisome le$el of close to ;=4= per cent4 *s a percentage of nominal 'DP3 t%e loanJ'DP ratio increased strongly from 0=; per cent et+een 011> and 011< to an excessi$ely %ig% le$el of 0;? per cent in /une 0112 04 In t%is3 loans dis ursed to t%e property sector constituted t%e largest s%are3 constituting ;048 per cent of total loans in /une 0112 and +as gro+ing at a strong rate of a o$e ;= per cent for most of 0112 >4 .%e strong lending to t%e property sector +as attri uted to t%e oom in t%e construction sector in t%e recent past4 .%e strong rise in property prices +as reflected y t%e Malaysian )ouse Price Index BM)PIC +%ic% gre+ y >?4? per cent and 0>4> per cent in 0110 and 011> respecti$ely4 .%is %ad encouraged in$ol$ement in t%e property market in $ie+ of profit expectations4 6Moral %aKard7 also played a large part in t%e rise in unproducti$e in$estment and loan dis ursement3 often leading anks to perform only a cursory re$ie+ of pro9ects and a$ailing loans for unprofita le or un producti$e sectors suc% as t%e property de$elopment3 stock market speculation and consumption credit4

II.5

Escalating Savings-Investment Gap and Current Account Deficit

Malaysia may oast of one of t%e %ig%est sa$ings rates in t%e +orld %o$ering around ;8,<= per centL ne$ert%eless t%e rate of in$estments %a$e een consistently %ig%er at a o$e <? per cent during t%e 011?,0112 period4 By t%e middle of t%e 011=s3 t%e sa$ings,in$estment gap +as e%ind t%e current account deficit4 In t%e past3 t%is gap +as ridged y Malaysia#s %ea$y reliance on "DI4 )o+e$er3 %ig% inflo+s of foreign in$estment and foreign de t actually resulted in %efty in$estment income outflo+s o$erseas4 H-%ile external de ts remained compara ly lo+3 domestic de ts +ere excessi$ely %ig%4 It represented a out 0:= per cent of 'DP y t%e end of 0112 +%ic% +as t%e %ig%est le$el of domestic inde tedness in &out%east *sia B*t%ukorala 0118CI4 *rgua ly3 t%e current account deficit per se may not e a pro lem ut t%e financing of t%e deficit does matter4 In 011< and 011?3 t%e current account deficit +as only partially financed y net long,term capital inflo+s4 Reliance on s%ort,term capital to co$er t%e current account deficit is not tena le in t%e long term ecause of t%e $olatile nature of t%is form of capital4 *t t%e same time3 s%arp increases in t%e outflo+ of 6re$erse in$estments7 et+een 011? and 0112 y Malaysian companies to finance long,term pro9ects H+it% no prospects of early returnsI %a$e inad$ertently exacer ated t%e country#s BOP pro lems4 In addition3

1 2

It further increased to 149% in December 1997 (BNM 1998) It touched 33% in December 1997 (BNM 1998)

many of t%ese out+ard in$estment pro9ects in ne+ emerging regions failed misera ly for t%e reason of t%e a sence or lack of proper analysis or detailed studies made of t%e situation prior to in$estment4

II.6

Liberalisation

&ince 011:3 t%ere %as een a s%arp decline in "DI flo+ing into Malaysia4 .%is %as significant repercussions on t%e economy4 .%is fall %as een caused y factors suc% as t%e reduction in /apanese in$estments o$erseas follo+ing t%e fall in $alue of t%e yen3 and per%aps more importantly3 ecause of t%e tig%t la our supply conditions in Malaysia3 +%ic%3 in t%e past3 %ad een one of t%e main attractions for la our,intensi$e industries4 .o an extent t%e fall in "DI +as offset y an increase in portfolio in$estment +%ic% gained importance eginning in 011; follo+ing t%e Malaysian go$ernment measures to li eralise t%e capital account4 &%ort,term portfolio in$estments can e a source of insta ility as t%ey are notorious for eing extremely 6footloose7 and dependent on in$estor sentiment4 *ny slig%t %int of economic3 political or social insta ility in t%e country or region may +ell result in capital flig%t4 Capital account li eralisation may %a$e its enefits3 t%e most important of +%ic% +ould e access to international sa$ings ut it could also pro$e to e a precarious step if an economy is not ready for it4 It %as een argued t%at3 in t%eir rus% to 9ump on t%e and+agon of glo alisation3 many !ast *sian economies %ad agreed to greater li eralisation3 especially financial li eralisation4 .%is may only e partly true in t%e case of Malaysia as s%e tends to +alk t%e t%in line et+een li eralisation and t%e continued protection of certain key industries at t%e same time3 one of +%ic% is t%e financial sector4 )o+e$er3 in terms of capital account li eralisation3 t%e long,term costs seem to %a$e out+eig%ed its enefits4

II.7

Lack of Institutional Infrastructure and Deficient Governance

een an onslaug%t of accusations of nepotism3 cronyism and ad go$ernance

.%ere %as also

pre$ailing in !ast *sian usiness and malpractices +it%in t%e go$ernment in t%e +ake of t%e crisis4 .%ere may e a %alf trut% in t%ese as many of t%ese elements are not necessarily unkno+n in de$eloped nations eit%er4 It must3 ne$ert%eless3 e admitted t%at3 in terms of go$ernance and institutions3 Malaysia Band most of !ast *siaC still %as a certain +ay to catc% up4 Malaysia still lacks t%e necessary institutional infrastructure t%at s%ould go %and in %and +it% industrial deepening4 &imilarly3 institutions necessary to generate t%e re5uired %uman resources for t%ese industries remain underde$eloped4 !$en t%oug% Malaysia %as launc%ed se$eral commenda le initiati$es to upgrade %er %uman resource de$elopment t%roug% a strengt%ening of %er institutions3 t%e de$elopment of %er infrastructure and support systems3 real progress in t%is direction %as often een limited or %ampered y pro lems of co,ordination3 among ot%ers4 .%e transition from a la our,intensi$e economy to a tec%nology, ased economy necessitates institutional support and control to facilitate t%e process4 &imilarly3 a %ig%er degree of transparency +ill facilitate t%e creation of a more fertile ground for good go$ernance to reed4

II.8

High Debt-Equity Ratios

*t t%e micro le$el3 de t,e5uity ratios of many corporate entities %a$e een a normally %ig%4 In addition3 t%ere %a$e een c%ronic mismatc%es +it% s%ort,term orro+ings eing employed to finance long,term in$estments B*riff 0111C4 *s a +%ole3 non,performing loans BNPLsC for t%e financial sector %o$ered at a not,too,alarming figure of 0= per cent ut certain anks %ad NPL ratios +%ic% exceeded <= per cent B ased on t%e international definition of ad loans as t%ose not ser$iced during t%e preceding t%ree mont%sC4 In spite of t%e Fs+eeping# reform measures carried out in t%e late 018=s follo+ing t%e 018?,8: crisis3 one %as to admit t%at unsound practices +it%in t%e financial system and poor corporate go$ernance continued4 .%is3 admittedly3 also contri uted to t%e financial crisis4 Rising M> Ba proxy for s%ort,term lia ilitiesC relati$e to international reser$es3 t%e ratio of +%ic% increased from ;4= per cent in t%e early 011=s to <42 per cent at t%e onset of t%e crisis3 s%ould e taken into account as yet anot%er indication of t%e gro+ing $ulnera ility of t%e Malaysian economy4 .%is rise eroded t%e a ility of t%e economy to defend t%e currency B*t%ukorala 0118C4

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III

The Impact on the Real Economy

.%e impact of t%e crisis on t%e real economy ecame e$ident only to+ards t%e end of 01124 In fact3 real 'DP managed to register a :4= per cent gro+t% in t%e fourt% 5uarter of 01124 .%ereafter3 t%e economy +ent t%roug% a dramatic do+nturn3 experiencing a s%arp contraction of 0=41 per cent in t%e t%ird 5uarter of 01184 In t%e last 5uarter of 01183 t%e situation impro$ed slig%tly +it% real 'DP s%o+ing a smaller contraction of 0=4; per cent4 .%is +as regarded y many as an indication t%at t%e economy may possi ly %a$e ottomed out4 .%e s%arp depreciation of t%e Malaysian ringgit led to rises in t%e price of imported items3 +%ic% +ere t%en passed on to domestic prices4 Inflation3 as measured y t%e Consumer Price Index BCPIC3 rose from around >4>,;4> per cent in t%e first %alf of 0112 to reac% a %ig% of :4> per cent y /une 01184 .%ereafter3 inflation %as een on t%e do+ntrend3 moderating to >4? per cent in /uly 01114 In spite of t%is3 t%e le$el of CPI inflation can still e considered $ery lo+ compared to t%e ot%er crisis, %it countries4 .%is may e partly attri uted to t%e composition of t%e asket of goods and t%e +eig%ts assigned to controlled items4 .%e impact on prices +as3 in fact3 more pronounced at t%e producer le$el4 During t%e crisis3 t%e Producer Price Index BPPIC rose into dou le,digit territory and remained t%ere for nine,mont%s3 reac%ing a peak of 024= per cent in /uly 01184 .%e s%arp depreciation of t%e ringgit and t%e plunge in stock prices ad$ersely affected many companies4 .o make t%ings +orse3 t%e %ig% interest rate en$ironment during t%e first %alf of 0118 and t%e decline in domestic and external demand se$erely affected t%e financial standing of firms4 .%is translated into a series of corporate restructuring exercises +%ere y many firms proceeded to eit%er cut +orkforce or reduce +ages4 .%e result +as an increase in t%e num er retrenc%ed +orkers4 HIn 01183 8;38:? employees +ere retrenc%ed as compared +it% 013=== a year priorI4 Of t%e total num er retrenc%ed3 ?< per cent came from t%e manufacturing sector4 .%e unemployment rate

10

increased from a condition of tig%t employment at around >4? per cent efore t%e crisis to a out ?4? per cent at t%e end of 01184 .%e rise in unemployment and inflation ecame t%e main c%annels t%roug% +%ic% t%e social impact of t%e crisis +as transmitted4 In addition to t%e existing poor3 a ne+ group of poor %as emerged as a result of t%e crisis4 .%e go$ernment#s su se5uent mo$e to repatriate foreign +orkers %as3 to some extent3 %elped in freeing some 9o s for locals4 Mont%ly retrenc%ment figures %a$e since declined from a %ig% of 0>3;;? people laid off in /uly 0118 to an a$erage of ;3808 during t%e first t%ree mont%s of 01114 .o facilitate mo ility3 t%e go$ernment set up training programmes to %elp retrenc%ed +orkers ac5uire ot%er skills +%ic% may still emergency4 &imultaneously3 t%e corresponding anking sector +as se$erely %it as corporate orro+ers +ent into difficulty due to declining demand4 .%e earlier in$estment oom3 +%ic% led to o$er,extended lending acti$ities y t%e anking sector3 left it suscepti le to rising non,performing loans BNPLsC4 On t%e e$e of t%e crisis in /une 01123 t%e anking sector +as t%oug%t to e in a relati$ely sound position4 .%e ratio of non,performing loans to total loans stood at only ;4: per cent4 .%e risk,+eig%ted capital ratio BR-CRC +as at a comforta le 0>4= per cent3 exceeding t%e minimum international standard of 84= per cent4 *s t%e crisis unfolded3 t%e NPLJtotal loans ratio gradually increased to a %ig% of 0<41 per cent in No$em er 01183 asing on t%e 6t%ree,mont% in arrears7 definition of NPLs4 HIf ased on t%e 6six,mont%7 definition3 t%e NPL to total loan ratio +ould %a$e reflected a %ig% of 14= per cent in t%e same periodI4 Due to t%eir %ig% NPLs3 a fe+ financial institutions +ere e$entually put under t%e central ank#s super$ision3 ut none +ere closed do+n4 In order to a$oid ank runs3 t%e go$ernment assured depositors t%at t%eir sa$ings +ere guaranteed y t%e go$ernment4 .%e NPL pro lem roug%t a out a ne+ cautiousness in anks4 *t t%e same time3 loan demand dropped drastically3 resulting in a slo+ing do+n in t%e rate of loan gro+t%4 By early 01113 loan gro+t% %ad ecome almost stagnant4 e in demand4 Most importantly3 t%e crisis %as re$ealed inade5uacies +it% regard to social safety nets to cus%ion t%e sudden loss of income at a time of

11

_________________________________________________________________________

IV

Stabilisation Measures and Recovery Efforts

!ssentially3 reco$ery efforts in Malaysia +ere %ome,spa+n4 @nlike .%ailand3 Indonesia or &out% (orea3 Malaysia re9ected IM" assistance3 a main reason for +%ic% +as ecause s%e did not +ant to commit %erself to t%e packaged reforms t%at come +it% IM" assistance4 Politically and socially3 t%ere +ould %a$e een constraints in doing so4 &ome sc%olars and analysts percei$ed t%e attitude of t%e Malaysian 'o$ernment during t%e initial stages of t%e crisis as t%at of a denial4 &eemingly %esitant and slo+ in response3 in$estors took it as a sign of a lack of political +ill to make t%e necessary effort to stem t%e crisis4 .%e un$eiling of t%e 0118 Budget in mid,Octo er 0112 +as anticipated to s%ed some glimmer of %ope ut t%is pro$ed to e a disappointment as it failed to li$e up to expectations4 .%is lack of direction +as Malaysia#s *rc%illes %eel at a time +%en neig% ouring countries +%ic% %a$e accepted IM" assistance seemed to %a$e3 at least3 a clear policy direction4 *s t%e situation deteriorated3 Malaysia e$entually introduced a reform package in Decem er 0112 +%ic%3 ironically3 reflected IM" policies for t%e region4 &ix mont%s later3 t%e situation forced an a out,turn in policies to fa$our an expansionary approac%4 Conceptually3 t%erefore3 after t%e initial 6listlessness73 Malaysia#s policy responses may e seen to %a$e gone t%roug% t+o $ery distinct p%ases4

IV.1

The Initial Months

.%e slide of t%e ringgit against t%e @& dollar and most ot%er currencies actually egan in Marc% 01124 In t%e %alf,decade prior to t%e *sian crisis3 t%e Malaysian ringgit exc%ange rate %ad een %o$ering in a narro+ and of RM>4;: and RM>4?0 to t%e green ack4 "rom a le$el of >4<8 against t%e green ack in Marc% 01123 it fell to an a$erage of >4?2 in /uly ;4 .%e Malaysian go$ernment#s first reaction +as to try to defend t%e status 5uo y rus%ing in to defend t%e national currency4 .%e Malaysian central ank endea$oured to up%old t%e currency for a out a +eek ut +as finally forced to float it on 0< /uly y +%ic% time it %ad lost close to @&A04? illion in its efforts to prop up t%e ringgit4 One main reason for suc% currency support operations +as t%e apparent desire of t%e aut%orities to defend t%e ringgit#s F5uasi,peg# against t%e dollar4 .%ere +as +idespread consensus t%at t%e ringgit %ad ecome o$er$alued y its F5uasi,peg# to t%e dollar3 especially as t%e @& economy and t%e dollar %ad strengt%ened significantly in recent years B/omo 0118C4 It +as3 t%us3 expected t%at t%e ringgit +ould depreciate to around RM>42= , RM;4== to t%e dollar +%ic% +as presumed to e an e5uili rium rate after %a$ing taken into account macroeconomic fundamentals3 purc%asing po+er parity3 etc4 )o+e$er3 $olatility persisted and t%e situation ecame particularly sensiti$e to Prime Minister Dr4 Ma%at%ir Mo%amad#s remarks against currency speculators and foreigners3 +%ic% in fact3 only ser$ed to con$ince t%e international community t%at Malaysia +as trying to side,step real issues and deflect responsi ility a+ay from %erself4

Currency Turmoil & the Malaysian Economy Genesis, Prognosis & Response, Mohamed Ariff et al, MIER 1998
3

12

*t t%e same time3 initiati$es +ere also made to inter$ene in s%are market operations in an attempt to cur speculati$e acti$ity4 In late *ugust 01123 t%e (L&! anned t%e s%ort,selling of 0== lue,c%ip stocks and regulations +ere introduced to discourage t%e sale of stocks4 &ellers +ere re5uested to p%ysically deli$er s%are certificates to rokers efore selling t%eir s%ares +%ile t%e period of settlement +as reduced from fi$e to t+o days4 By early &eptem er 01123 a plan to allo+ funds in t%e !mployees# Pro$ident "und to prop up s%are prices y uying stocks from Malaysian s%are%olders at a premium a o$e pre$ailing prices +as un$eiled y t%e go$ernment4 .%ese measures3 in fact3 only ser$ed to erode in$estor confidence in Malaysia3 e$entually leading to a massi$e sell,off of stocks in t%e (L&!4 &u se5uently3 t%ere +as some +it%dra+al from some of t%ese early policies in t%e +eeks t%at follo+ed4 .%e an on s%ort,selling +as lifted in &eptem er 0112 and in t%e same mont% t%e go$ernment announced t%e postponement of some so,called mega,infrastructure pro9ects4 .%ese mo$es nots+it%standing3 it could e seen t%at t%e go$ernment still did not %a$e a clear policy direction as yet t%ree mont%s into t%e crisis4

IV.2

Virtual IMF Policies

"i$e mont%s into t%e crisis3 t%e t%en Deputy Prime Minister and "inance Minister of Malaysia *n+ar I ra%im announced a reform package on ? Decem er 01124 .%e package reflected t%e IM" sta ilisation measures undertaken y some of t%e neig% ouring economies4 @nder t%e pre$ailing situation t%en3 t%e tig%t monetary policy already in place prior to t%e crisis +as furt%er tig%tened4 "urt%er policy measures +ere announced as 0118 unfolded and t%e National !conomic *ction Council BN!*CC +as esta lis%ed in /anuary 0118 to act as a consultati$e ody to deal +it% t%e crisis in early /anuary4 Interest rates +ere raised so t%at t%ey +ere in line +it% t%e expected %ig%er rate of inflation4 .%e central ank furt%er cur ed loans3 and a credit plan to limit t%e gro+t% of loans to >? per cent y t%e end of 01123 >= per cent y t%e end of t%e first 5uarter of 0118 and 0? per cent y t%e end of 0118 +as introduced4 &tringent guidelines on %ire,purc%ase lending and lending to t%e property sector Bexcluding lo+ and medium,cost residential properties3 factories and industrial issued4 "iscal spending +as scaled do+n and t%e implementation of $arious infrastructure pro9ects +ere eit%er cancelled or deferred4 .%e o 9ecti$e +as to reduce imports and to address t%e pro lem of excessi$e credit gro+t% as +ell as t%e %ig% le$erage of some corporations4 &imultaneously3 prudential regulations of t%e financial system +ere ad9usted to e in line +it% international norms4 *ccordingly3 NPLs +ere reclassified as loans in arrears for t%ree mont%s instead of six mont%s as Malaysia %ad pre$iously stipulated4 .%e rate for general pro$isioning +as increased and t%e central ank pursued a merger programme for finance companies4 Ne$ert%eless3 maintaining t%is delicate alance of pursuing a tig%t monetary and fiscal policy +it%out excessi$ely affecting t%e already slo+ing economy +as rendered extremely difficult y t%e $olatile uildingsC +ere

13

external financial en$ironment of t%e period4 Being contractionary3 t%e F$irtual IM" policy# roug%t more pains instead4 'i$en t%e strengt% of t%e go$ernment financial position3 t%ere +as no necessity for suc% a drastic slas% on expenditure4 .%e measures managed to contain price increases and succeeded in re$ersing t%e current account of t%e alance of payments t%roug% import compression from a deficit to a surplus position4 )o+e$er3 t%ey se$erely dampened pri$ate sector usiness acti$ity and only ser$ed to +orsen t%e cas% flo+ pro lem of t%e usiness community already adly affected y t%e ringgit#s depreciation4

IV.3. The Expansionary Stage

Malaysia +as caug%t et+een &cylla and C%ary dis as any easing of interest rates to oost spending +ould send t%e ringgit and in$estor confidence on a furt%er do+n+ard spiral +%ile %ig% interest rates +ould continue to c%oke t%e usiness community4 *s t%e economic situation continued to deteriorate3 policy,makers egan dou ting t%e feasi ility of t%e com ination of a tig%t monetary and fiscal policy regime4 .%e second 5uarter 'DP contraction of :48 per cent BMI!R 0118C plunged Malaysia into recession and prompted a ret%inking in fa$our of a more expansionary policy4 *fter t%e rief experiment +it% IM",style macroeconomic measures3 t%e Malaysian go$ernment mo$ed in t%e opposite direction3 initiating monetary and fiscal expansion as t%e middle of 0118 unfolded4 In /uly 01183 t%e go$ernment launc%ed t%e National !conomic Reco$ery Plan BN!RPC3 pro$iding a compre%ensi$e frame+ork for an economic turnaround4 Its o 9ecti$es3 among ot%ers3 +ere to strengt%en macroeconomic fundamentals3 sta ilise t%e national currency3 restore market confidence3 maintain financial sta ility and continue +it% t%e socio,economic agenda4 .%e N!RP recommended t%e easing of monetary and fiscal policies and t%e lo+ering t%e cost of capital to re$italise t%e economy4 .%is includes a +ide,ranging proposal for economic sta ilisation and structural reforms and at t%e same time3 addressing socio,economic priorities4 Interest rates peaked in /une 01184 .%e t%ree,mont% inter ank rate3 +%ic% +ent up to an a$erage of 004=? per cent in /une 0118 declined to 0=4>> per cent in *ugust4 In t%e same mont%3 t%ere +ere t%ree do+n+ard re$isions in t%e t%ree,mont% inter$ention rate of t%e central ank3 ringing t%e rate do+n y 0?= asis points4 By No$em er 01183 it %ad gone do+n to 2 per cent4 .%e lo+ering of t%e &RR %ad3 in fact3 egun in mid,"e ruary as it +as lo+ered from a %ig% of 0;4? per cent to 0= per cent4 It continued to e su se5uently lo+ered in stages in t%e follo+ing mont%s4 .%e Base Lending Rate BBLRC for commercial anks %as gone do+n from 0041: per cent in Marc% 0118 to 24>< per cent in /uly 01114 .%e lo+ering of interest rates3 nonet%eless3 sparked accusations t%at in$estment flo+s +ill e discouraged4 &uc% accusations are unfounded as lo+ interest rates are a oon for t%e ond market and experience %as s%o+n t%at a %ig% interest rate is not t%e sole criteria to attract foreign capital during Fa normal circumstances#4 .%is includes portfolio funds3 despite t%e fact t%at interest rate considerations tend to e one of t%e factors t%at t%ey are sensiti$e to4 H"DI is generally not influenced y t%e interest rate,exc%ange rate factorI4 "oreign in$estors tend to look at t%e regional market as an

14

entity rat%er t%an focusing on an indi$idual country market4 )ig% interest rates in Malaysia in t%e mont%s follo+ing t%e onslaug%t of t%e crisis did not result in an inflo+ of capital4 )o+e$er3 t%ey ser$ed to deter a flig%t of domestic funds in searc% of etter returns offered y offs%ore facilities4 *t t%e same time3 t%e go$ernment introduced a fiscal stimulus package of RM2 illion3 expanded existing funds and set up ne+ specialised funds targeted at specific priority sectors4 .%e stimulus package +ould see t%e o$erall pu lic sector account registering a managea le deficit of 048 per cent of 'NP in 0118 and ?4? per cent in 0111 B-%ite Paper 0111C4 .%e go$ernment also +ent on to li eralise t%e e5uity policy for t%e manufacturing sector to furt%er promote "DI4 Certain sectors including telecommunications3 s%ipping and for+arding3 insurance3 tourism and M&C,appro$ed acti$ities sa+ t%e relaxation of t%e ;= per cent limit imposed on foreign o+ners%ip<4

IV.4

Introduction of Capital Controls - The Move into Controversy

*fter t%e c%ange in policy orientation3 some progress +as o ser$ed in containing inflation3 impro$ing t%e external alance and maintaining a lo+ external de t exposure4 )o+e$er3 t%e economy continued to remain $ulnera le to external de$elopments and insta ility in regional financial markets4 &imilarly3 t%is also affected t%e progress of t%e on,going reforms in t%e country4 -it% little room for manoe$res3 Malaysia imposed selecti$e capital controls and pegged t%e ringgit at ;48= to t%e dollar on 0 &eptem er 01184 .%ese 6s%ocking7 measures +ere meant to insulate t%e economy in order t%at monetary policy could e set +it%out t%e external disciplining forces to reckon +it%4 It +as3 to a large extent3 moti$ated y t%e second 5uarter contraction of :48 per cent3 plunging t%e economy into recession3 as +ell as t%e $olatile capital flo+s t%at +ere continuing to nullify attempts to re$i$e t%e economy4 .%e imposition of t%e controls rendered t%e ringgit +ort%less eyond t%e national orders3 effecti$ely closing t%e ringgit market to speculators4 In addition3 portfolio funds are su 9ected to a one,year %olding period efore t%ey can e repatriated a road4 *t t%e same time3 as t%e controls are designed to selecti$ely target portfolio funds3 "DI inflo+s and outflo+s are gi$en exemptions4 .%e direct one, off impact of t%e controls +as t%e inflo+ of RM0> illion parked a road3 and t%e 6trapping7 of a out >; per cent of (L&! capitalisation o+ned y foreigners4 .%e capital controls effecti$ely put an end to offs%ore ringgit trading and t%e offs%ore trading of s%ares4 -%ile t%ey may not e a solution to t%e crisis3 selecti$e controls +ill pro$ide a temporary respite for t%e affected country to undertake reforms4 Re$ising its policy3 t%e go$ernment %as since introduced an exit tax +it% $aria le rates depending on t%e lengt% of stay of t%e receipts4 @nder t%is graduated exit le$y system3 foreign funds ot%er t%an "DI are di$ided into t%at +%ic% entered t%e country prior to 0? "e ruary 0111 and inflo+s after t%at date4 * special external account +as created under t%e exit le$y system for funds roug%t in on or efore 0? "e ruary4 "or in$estments entering t%e country after 0? "e ruary3 t%e principal can e repatriated
.%e relaxation in e5uity policy applies to applications recei$ed et+een ;0 /uly 0118 and ;0 Decem er >===3 as +ell as t%ose already received but pending approval.
4

15

freely ut profits are su 9ected to a graduated le$y4 .%ese measures are intended to encourage a longer term approac% to foreign portfolio in$estors and to discourage desta ilising s%ort,term flo+s4 .%is relaxation did not result in a ma9or outflo+ of foreign capital3 indicating3 per%aps3 t%at foreigners are still interested in Malaysia#s financial markets4 .%e end of t%e one year moratorium on 0 &eptem er 0111 did not +itness a massi$e outflo+ of funds eit%er4 .%e certainty t%at t%e fixed exc%ange rate %as roug%t a out may e a positi$e factor in t%is sense3 despite t%e additional %assle of going t%roug% additional procedures4 *lso3 in$estors may %a$e c%osen to stay for t%e fact t%at economic indicators in Malaysia %a$e impro$ed and t%e regional outlook is rig%ter t%an a year ago4 -%at is more3 t%e under$aluation of t%e ringgit pro$ides an incenti$e for foreign capital to stay in Malaysia4 Ne$ert%eless3 one s%ould not attri ute all t%e recent positi$e de$elopments to t%e control measures in place4 &imilar positi$e signs %a$e also een registered in ot%er crisis,%it countries in t%e region +%ere no exc%ange or capital controls are in place4 *lt%oug% it is too early to esta lis% any causality3 it does appear t%at t%e 6regional trend7 factor %as played an important role in influencing t%e Malaysian economy3 apart from domestic policies3 during ot% t%e meltdo+n and t%e su se5uent reco$ery4

IV.5

Financial and Banking Sector Reforms

.%e organisation of t%e anking and financial system plays a crucial role in t%e de$elopment of a nation4 It is3 t%erefore3 not an exaggeration to say t%at t%e %ealt% of t%e economy is critically dependent on t%at of t%e anking and financial system4 In t%is sense3 t%e intrinsic link et+een macroeconomic policies and t%e financial sector cannot e denied4 In t%e past couple of years3 t%e !ast *sian crisis %as exposed t%e dark side of t%e interface et+een t%e financial and t%e real sectors of t%e economy4 -%at egan as a currency crisis e$ol$ed into a financial crisis efore transforming itself into a full lo+n economic crisis3 +it% anks and ot%er financial institutions taking t%e centre stage as t%e drama unfolded4 .%e currency crisis fuelled concerns a out t%e %ealt% of t%e anking system in t%e crisis,%it economies4 !xcessi$e lending +it%out ade5uate safeguards %a$e een t%e main dra+ ack of financial institutions3 resulting in soaring non,performing loans BNPLsC and gross capital inade5uacy4 In se$eral crisis,%it economies3 t%e anking system took a se$ere eating +it% many institutions folding up altoget%er3 +%ile t%e real sector in t%ese economies suffered adly as a conse5uence4 Malaysia +as3 %o+e$er3 more fortunate in t%e sense t%at none of t%e anks ca$ed in4 .%e Malaysian financial sector %as experienced a radical transformation and deepening in tandem +it% t%e de$elopment of %er economy since t%e immediate post,independence years4 O$er t%e years3 inno$ations and reform measures %a$e gradually taken place side y side4 )indsig%t suggests t%at t%is3 coupled +it% good central, ank super$ision and sur$eillance must %a$e %ad muc% to do +it% t%e remarka le resilience of t%e Malaysian anking system4 -%ile Malaysia may e credited for maintaining sound financial policies and good super$ision3 it must not e denied t%at in%erent +eaknesses do exist +it%in t%e system4 .%us3 t%e concerns a out t%e %ealt% of %er anking system in t%e aftermat% of t%e crisis4 Rising NPLs in t%e anking sector ga$e rise to t%e fear of systemic ank

16

failures4 Ne$ert%eless3 t%e NPL pro lem in Malaysia pales in comparison +it% t%at of ot%er crisis,%it countries in t%e region4 It also pales in comparison +it% Malaysia#s o+n pre$ious experience in t%e mid,018=s crisis +%en NPLs rose as %ig% as ;; per cent of t%e total loans4 .%is time around3 t%e NPL ratio +as at most3 approximately one,%alf of +%at it +as in t%e last crisis B0<41 per cent in No$em er 0118 if measured y 6t%ree,mont%s7 classificationC4 .%e t%rust of Malaysia#s anking and financial sector reform measures introduced during t%e crisis +as t+o fold4 .%ey +ere aimed at sta ilising t%e anking system in t%e immediate period3 and uilding a strengt%ened3 more resilient anking sector o$er t%e medium to long term4 &%ort,term measures +ere initiated to ensure t%e smoot% functioning of t%e intermediation process3 +%ile rationalisation3 consolidation and reform of t%e financial and anking sector +ere initiated t%roug% t%e setting up of an asset management company3 a ank recapitalisation agency3 a corporate de t restructuring committee3 and mergers4 .%ese represented part of t%e long,term strategy to strengt%en and consolidate t%e sector4 .+o agencies3 du ed 6&pecial Purpose Me%icles73 namely3 FDana%arta# and FDanamodal#3 +ere esta lis%ed to deal +it% NPLs4 -%ile Dana%arta +as created to uy up ad loans and take o$er t%e supporting assets3 Danamodal +as esta lis%ed to in9ect capital into anks +%ic% %ad to ear losses resulting from t%e sale of NPLs4 By t%e end of /uly 01113 Dana%arta %ad ac5uired and managed loans amounting to RM;1 illion from t%e financial system3 representing 03111 loan accounts4 "rom t%e anking system alone3 Dana%arta ac5uired and managed NPLs amounting to RM>84? illion or ;? per cent of total NPLs in t%e anking system4 -it% t%is3 t%e net NPL ratio %ad moderated to 241 per cent ased on a six,mont% classification as at t%e end of /une 0111 after peaking at 14= per cent as at t%e end of No$em er 01184 If ased on t%e international t%ree,mont% classification of ad loans3 t%e NPL ratio +ould e in t%e $icinity of 0; per cent4 *t t%e same time3 Danamodal %ad pumped RM:4> illion into t%e anking system4 Risk,+eig%ted capital ratio BR-CRC is also at fairly comforta le le$els3 partly due to ne+ capital in9ections and partly due to t%e tendency for anks to a$ert %ig%,risk lendings4 .%is reflects t%at Dana%arta and Danamodal %a$e performed fairly +ell so far4 Ne$ert%eless3 t%ere is still muc% more to e done4 .%e arduous task of uying up ad loans at reasona ly discounted prices and financing t%em +it% Kero,coupon onds may seem easy compared +it% t%e more daunting task of managing t%e assets t%at %a$e een ac5uired in t%e process4 In many cases3 t%e restructuring of underlying usinesses and assets are necessary4 .%us3 esides de t restructuring3 operational restructuring is $ital for t%e long term and as e$idenced in t%e Mexican experience3 restructuring and recapitalisation are lengt%y and complicated processes4 Malaysia#s Dana%arta +ill e +orking along t%e lines of t%e successful &+edis% &ecurum *sset Management Company4 Dana%arta %as pro9ected to start selling NPLs as soon as t%e ac5uisition p%ase is o$er ut only after %a$ing first gone t%roug% an acti$e restructuring role4 *pparently3 Dana%arta %as no+ emerged as t%e iggest o+ner of real estates in t%e country in t%e process4 @nder present circumstances3 disposing t%ese properties in an orderly fas%ion +it%out upsetting t%e market is not going to e easy3 gi$en t%e %uge supply glut4

17

&imultaneously3 t%e Corporate De t Restructuring Committee BCDRCC +as esta lis%ed to complement t%e t+o agencies a o$e y pro$iding a c%annel for anks and de tors in distress to sort out an agreea le and +orka le loan restructuring exercise4 *s at >= *ugust 01113 :> applications %a$e een recei$ed3 of +%ic% 0= restructuring sc%emes in$ol$ing de ts of RM0=4> illion %a$e een completed and are in t%e process of eing implemented4 .%ree cases in$ol$ing de ts of RM040 illion %a$e actually een sold to Dana%arta3 +%ile 0> ot%er cases in$ol$ing de ts of RM >41 illion %a$e een re9ected4 Ne$ert%eless3 +it%out any empo+erment3 and eing 9ust a facilitator ringing creditors and de tors to t%e negotiating ta le3 t%ere is $ery little t%at t%e CDRC can actually do4 .%e o$er%ang of corporate de ts is certainly a cause for concern4 Banks and finance companies are still saddled +it% a out t+o,t%irds of t%e NPLs as Dana%arta %as managed to a sor only one,t%ird4 !$en t%oug% Malaysia#s external de ts are not large relati$e to gross domestic product B'DPC y de$eloping country standards3 %er total domestic de t is $ery %uge4 Bank loans +%ic% represent t%e largest c%unk of domestic de t amount to 0<? per cent of 'DP Bt%e pre,crisis peak +as 0;? per centC3 +%ic% is3 y far3 t%e largest in &out%east *sia4 .%is does not go $ery +ell +it% t%e central ank#s call for %ig%er loan gro+t% in order to stimulate t%e economy4 )ig%er loan gro+t% +ill raise t%e loan,'DP ratio +%ic% is already too %ig%3 t%ere y +eakening t%e country#s macroeconomic fundamentals4 One redeeming feature is t%at t%e central ank#s reser$es %a$e increased significantly +it%in t%e last year4 "or a small population of >> million3 Malaysia is considered o$er anked +it% >0 commercial anks3 0> merc%ant anks and >? finance companies3 not to mention foreign,o+ned institutions4 In order to furt%er consolidate and rationalise t%e anking system to meet t%e c%allenges of an increasingly glo alised market3 t%e central ank %as encouraged anks and finance institutions to merge4 In t%e initial p%ase of t%e crisis3 t%e num er of finance companies +as reduced from ;1 to >? upon central ank inter$ention4 .%e central ank no+ plans to reduce t%e num er of ?8 domestic financial institutions to 9ust : anc%or institutions y getting t%em to merge4 .%is exercise +ill3 ne$ert%eless3 not in$ol$e locally,incorporated foreign anks4 .%e t+o main o 9ecti$es of t%is consolidation process are3 to enlarge t%e capital ases t%ere y ensuring a etter management of risks and en%ancing t%e resilience of t%e system3 and3 to cut costs and impro$e t%e competiti$eness of local institutions4 .rue3 a merger exercise of t%is proportion +ill en%ance prudential super$ision and reduce systemic risks esides producing larger and stronger institutions capa le of meeting future glo al competition4 )o+e$er3 5uestions arise as to %o+ t%e operations +ill e funded and +%ere t%e t%ousands of retrenc%ed employees +ill go4 More +orrisome still +ill e t%e implications of t%is exercise on t%e day,to,day management of t%e institutions if attention is di$erted a+ay from suc% pressing pro lems as ad loans to t%e mega,merger exercise3 not to mention significant inter ank cultural differences t%at +ould c%allenge post,merger %armonisation4 "urt%ermore3 it must seen %ere t%at mergers alone cannot transform t%e anking system into a formida le force o$ernig%t4 .%e fact remains t%at some small anks %a$e performed etter during t%e crisis t%an some igger ones4 &iKe may still matter ut siKe is not synonymous +it% professionalism3 competence and t%e le$el of sop%istication and

18

efficiency4 *ll t%is %as muc% to do +it% t%e competiti$e en$ironment +it%in +%ic% anks operate4 .%is o ser$ation underscores t%e importance of deregulation and li eralisation in t%e anking reform exercise4 .%e merger exercise +ould ecome more meaningful if anking reforms include an agenda to expose t%e sector to increased competition3 pa$ing t%e +ay for a greater opening of t%e anking and financial sector to foreign competition4

_________________________________________________________________________

Developments Thus Far

.%e expansionary policies +ent some +ay to+ards impro$ing gro+t% prospects for t%e economy4 )o+e$er3 t%ere may e some time lag efore t%e effecti$eness of t%ose policies fully filter into t%e system4 *fter a decline o$er fi$e consecuti$e 5uarters3 t%e economy recorded a positi$e gro+t% of <40 per cent in real 'DP in t%e second 5uarter of 01114 In fact3 t%e uptrend %as een e$ident since "e ruary 01114 'DP gro+t% emanated ot% from a strong external demand as +ell as a reco$ery in domestic demand4 &ince t%e fourt% 5uarter of 01183 t%e expansion in t%e external sector %as furt%er strengt%ened4 .%is %as generated increases in income +%ic% pro$ided t%e asis for a significant re$i$al in pri$ate consumption4 .%e current reco$ery is supported y t%e continued strengt%ening of Malaysia#s macroeconomic fundamentals4 .%is may e seen in t%e current lo+ inflation3 t%e fa$oura le trade performance3 increasing external reser$es3 impro$ed la our market conditions and a lo+ external de t position3 especially s%ort,term de t4 Reflecting t%is3 market sentiments %a$e furt%er impro$ed as indicated y %ig%er capital market acti$ities3 continued loan gro+t%3 %ig%er pri$ate consumption and an increase in property transactions4 *ccording to t%e Consumer &entiments &ur$ey conducted y t%e Malaysian Institute of !conomic Researc% BMI!RC3 consumer confidence soared to ne+ %eig%ts +it% t%e Consumer &entiments Index BC&IC leapfrogging to 0=04: points in t%e >N113 from a lo+ 8< points t%e pre$ious 5uarter4 .%e C&I ottomed out in t%e second 5uarter of 01183 at an all,time lo+ of 2140 points4 *lt%oug% t%e latest index is still elo+ t%e all,time %ig% of 0;;4< points recorded in >N123 arring some unforseen e$ent3 a return in confidence in t%e coming 5uarters looks ine$ita le4

Cons(mer &entiments Inde0

19

180 160 140 120 100 80 60 40 20 0 93:1 94:1 95:1 96:1 97:1 98:1 99:1 2 3 4 2 3 4 2 3 4 2 3 4 2 3 4 2 3 4 2

160 140 120 100 80 60 40 20 0

Employment Index

Consumer Sentiment Index

&imilarly3 t%e domestic la our market situation impro$ed in t%e second 5uarter +it% a reported increase in 9o $acancies3 mainly in t%e manufacturing sector3 and fe+er retrenc%ments4 Reflecti$e of t%is3 MI!R#s !mployment Index surged a%ead +it% consumers expecting rig%ter 9o market opportunities3 rising y >; points from t%e pre$ious 5uarter to 00>4; points in >N114 *t t%e same time3 loan,gro+t% Bincluding NPLs sold to Dana%artaC %as picked up again from a lo+ of =4< per cent in /anuary 0111 to reac% t%e $icinity of 048 per cent in May in t%e second 5uarter4 If NPLs ac5uired y Dana%arta +as excluded3 t%en loan gro+t% +ould e ,<4; per cent in May 01114 .%e gradual acceleration in loan gro+t% in 0111 reflects a moderate increase in demand for loans as economic acti$ities pick up4 In fact3 for commercial anks3 loan gro+t% %as already reac%ed a nota le le$el of 84= per cent4 Loan appro$als +as also maintained at a %ig%er 5uantum of RM24: illion in May 01113 muc% %ig%er t%an t%e RM<,? illion a$erage last year4

20

1oans and +e#osits -ro2th 34 change year/on/year5

35 0 30 0 25 0 20 0 15 0 10 0 50 00 -5 0

*o+-97

,e)-97

!"n-97

()t-97

!"n-98

!ul-98

()t-98

*o+-98

%"y-97

%"y-98

,e)-98

!un-97

!ul-97

!un-98

%"r-97

&u'-97

Sep-97

&u'-98

Sep-98

!"n-99

-ot"l .o"ns

-ot"l ,eposits

&imultaneously3 manufacturers %a$e reacted fa$oura ly to t%e positi$e economic de$elopments4 *fter a lacklustre performance seen in t%e last six 5uarters3 manufacturers are ready to kick,start operations in $ie+ of t%e impro$ing demand conditions4 .%e MI!R Business Confidence Index BBCIC surged past t%e ?=,point enc%mark in t%e second 5uarter of 0111 to a le$el of :=4; points from <84> points registered in t%e pre$ious 5uarter4 On a scale measuring up to 0== points3 le$els eyond ?= points are $ie+ed as a plus factor in usiness acti$ities4 Based on t%is ackdrop3 gross fixed capital formation is expected to expand at a moderate rate of ;41 per cent in 01113 re ounding from a steep <>41 per cent fall in 01184
6(siness Conditions Inde0
15 GDP BCI 80 70 10 60 50 40 0 30 20 -5 10 -10
III/ III/ III/ III/ III/ III/ 1992:I / 1993:I / 1994:I / 1995:I / 1996:I / 1997:I / III/ 1998:1/ 1999:I / I0/ I0/ I0/ I0/ I0/ I0/ I0/ II/ II/ II/ II/ II/ II/ II/ II/

%"r-99

&pr-97

%"r-98

#e$-98

#e$-97

&pr-98

#e$-99

1,2

3CI

On t%e supply side3 reco$ery +as road, ased +it% positi$e gro+t% in ot% t%e domestic and export, oriented industries4 In tandem +it% increasing sales3 manufacturing production rose s%arply in t%e second 5uarter4 .%e sector re ounded to increase y 0=4< per cent B0N 0111O 040 per centC4 *lso3 it is

21

pertinent to note t%at +%ile production %as s%ifted to a %ig%er gear3 t%ere %as een little e$idence of in$entory uild,up4 In$estment spending +as also seen to mo$e in tandem +it% t%e momentum of manufacturing expansion in t%e second 5uarter of 01114 .%e o$erall capacity utilisation rose to 80 per cent in t%e second 5uarter of 01113 an up+ard surge from 2241 per cent reported in t%e pre$ious 5uarter4 On t%e demand side3 t%e pick up in pu lic sector expenditure and t%e re ound in pri$ate consumption expenditure contri uted to t%e strong economic expansion in t%e second 5uarter of 01114 Monetary gro+t% furt%er expanded in t%e second 5uarter of 0111 +it% M; increasing y RM842 illion or >40 per cent? +%ile interest rates declined in t%e same 5uarter due to t+o reductions in t%e central ank#s t%ree,mont% inter$ention rate as +ell as a furt%er increase in t%e resource surplus of t%e anking system4 -it% furt%er reductions in t%e inter$ention rate:3 t%e a$erage ase lending rates BBLRC of commercial anks and finance companies sa+ a furt%er decline4 .%e stock market %as also reco$ered strongly to record ne+ %ig%s in trading acti$ities4 )o+e$er3 t%is need not necessarily e reflecti$e of t%e performance of t%e real sector4 In t%is context3 it is likely t%at t%e reco$ery in regional markets %as3 in some +ay3 contri uted to t%e re ound4

Money &(##ly -ro2th 34 change year/on/year5

.%e Malaysian economy is no+ expected to post a gro+t% of a out ; per cent in 01113 follo+ing a se$ere 24? per cent contraction in 01184 .%is gro+t% is expected to e mainly dri$en y pu lic sector spending rat%er t%an pri$ate sector expenditure4 In t%e year >===3 real 'DP gro+t% is pro9ected to exceed <4= per cent4 .%is is expected to e roug%t a out y t%e reco$ery in t%e pri$ate sector3 t%e continuation of expansionary fiscal and monetary policies3 and a etter external BexportC en$ironment +it% t%e acceleration in glo al economic gro+t%4 Pri$ate consumption is forecast to gro+ y 24; per cent +%ile pu lic consumption is predicted to rise y 84> per cent4

Malaysia7 $eal -ro2th 'y +omestic +emand

2Q1998: -RM5 billion or -1.3%; 1Q1999: +RM8 billion or +2% The 3-month intervention rate was reduced by another 50 basis points on 9 August leading to a further decline in banks BLRs
5 6

22

)o+e$er3 one must not fail to realise t%at t%ere may e some do+nside risks4 If t%e external en$ironment does not turn out as expected and if /apan continues to remain in deep recession3 Malaysia#s exports +ill e affected4 .%e trade surplus +ould decline and foreign reser$es +ill e reduced4 @nder t%ese conditions3 it +ould e difficult to maintain t%e exc%ange rate peg and t%e exc%ange controls4 *t t%e same time3 firms may not expand as muc% as %oped for despite t%e lo+ interest rates4 .%ey may e urdened y %uge de ts and may not e +illing to expand during a recessionary period +%ile anks may e o$er,cautious in lending and reducing funds needed for in$estment and consumption4 "inally3 funding re5uirements for strengt%ening t%e anking sector and t%e additional fiscal expenditure may not e enoug%4

_________________________________________________________________________

VI

Globalisation, Short-term Capital and Instability

In t%e past couple of years3 t%e financial turmoil t%at descended on t%e !ast *sian region %as dra+n muc% attention to t%e role and t%e F e%a$iour# of $olatile s%ort,term capital4 .%e sudden acute pre, occupation +it% t%e su 9ect surpasses discussions and de ates on t%e same follo+ing t%e !uropean !RM saga in 011; and t%e Mexican crisis of 011<J011?4 Central to t%e current argument is t%e notion of a rapid and recent process of economic glo alisation4 In t%e dept%s of it all3 t%e +orld economy %as seen its asic dynamics internationalised and dominated y uncontrolla le market forces3 t%e principal economic agents and actors of +%ic% are identified as transnational corporations and s%ort,term portfolio in$estors +%o o+e allegiance not to nation,states ut to +%ere$er profit and ad$antage may lure t%em4 .%e glo alisation t%esis %as ecome so po+erful t%at it %as een endorsed y practically all spectrums of society in t%e +orld4 Eet3 it must e realised t%at t%e current %ig%ly internationalised economy is not an unprecedented p%enomenon4 It is3 in fact3 one of t%e different con9unctures of t%e +orld economy t%at %a$e manifested since t%e Industrial Re$olution4 )istory testifies to t%at4 In certain aspects3 today#s international economy is3 in fact3 less open t%an t%e

23

regime t%at operated et+een t%e late 08:=s and t%e "irst -orld -ar4 * difference is t%e degree and le$el of tec%nology t%at is t%e catalyst for t%e current process3 and t%is3 seemingly spear%eaded y an opening not only of political space scenario4 !merging +it% t%e opening of economic space is a ne+ et%os of 6openness73 +%ic%3 t%is time around3 is expected to e t%e %erald of t%e second urst of capitalism4 .%is ne+ neo,li eralism %as essentially een regarded as t%e flip side of t%e glo alisation coin3 +%ere open markets and open economies are increasingly extolled as t%e generators of +ealt%4 @nfortunately3 t%e recent crisis in t%e !ast *sian region %as s%aken off some of t%e gli assumptions a out glo alisation and neo,li eralism4 .%e seismic s%ake,out %as pro$oked a serious re,t%inking along suc% lines3 especially among t%e seriously afflicted4 It %as gone on to underscore t%e asis of t%e anti,t%esis of glo alisation and openly 5uestioned t%e sense of post,Cold -ar *nglo,*merican ultra,li eralism4 On a large scale3 it %as gone on to c%allenge t%e postulates of t%e enefits of free market capitalism +%ic% +as assumed to %a$e routed all ot%er forms of economic organisation4 A priori3 some like Ric%ard )iggot and Nicola P%illips of -ar+ick3 %a$e simply descri ed t%e crisis +%ic% %as3 to a certain extent3 extended eyond t%e !ast *sian geograp%ical space3 as t%e first 6crisis of glo alisation74 B)iggot D P%illips 0111C !ssentially3 t%e stark differences et+een free trade and free capital flo+s oug%t to e clearly recognised4 !conomic logic and e$identiary trends of t%e success of free trade orientation o$er t%e past four decades %a$e o $iously gi$en a solid asis to neo,li eral t%eories and %a$e een a ma9or force e%ind t%e pus% to+ards accelerated li eralisation and deregulation across economic and geograp%ical space4 Nonet%eless3 t%e same logic does not necessarily apply to unfettered financial and capital flo+s4 Milton "riedman once said t%at speculati$e flo+s tend to e 6sta ilising and +elfare,en%ancing7 as speculators etting against 6fundamentals7 +ould e +iped out in t%e marketplace4 Contrary to t%is claim3 t%e catastrop%e resulting from t%e mid,0112 meltdo+n in !ast *sia accentuates t%e $ery imperfect nature of markets4 "inancial markets are not c%aracterised y auto,regulation as supporters of neo,li eral t%eory +ould %a$e it4 Rat%er3 $olatility and anarc%y rule4 !conomic %istorian C%arles (indle erger descri ed capital flo+s as su 9ected to 6panics3 manias and cras%es74 6)ot money7 in t%e form of s%ort,term capital flo+s tends to e %ypersensiti$e to small c%anges e$en t%ose of a psyc%ological or percepti$e nature3 let alone c%anges of a fundamental kind4 In t%e past decade3 t%e li eralisation of economies did not progress symmetrically4 !ssentially3 t%e li eralisation of t%e international trade structure %as een slo+ and as suc%3 %as allo+ed de$eloping countries a certain comparati$e ad$antage4 .%is cannot e said of t%e international capital markets +%ere full li eralisation is $irtually complete4 Competiti$e dynamics3 t%e need to lure capital and t%e gro+ing ad$ocacy of t%e ad$antages of neo,li eralism %a$e een t%e dri$ing force e%ind many de$eloping economies# mo$e to li eralise t%eir capital markets4 Many !ast *sian go$ernments3 encouraged y institutions suc% as t%e -orld Bank and t%e IM"3 li eralised t%eir financial systems including t%eir capital account meaning a freer flo+ of firms# financial asset transactions4 .%is3 as ut simultaneously3 of economic space in t%e post,&o$iet

24

+e %a$e mentioned pre$iously3 %as

een furt%er augmented

y astounding ad$ances in

telecommunications and information tec%nology3 greatly facilitating international financial transactions and increasing capital mo ility4 *ll t%is %as led to a rapid integration of glo al financial markets4 *s a conse5uence3 in$estment funds %a$e gro+n enormously in importance3 operating under intense competiti$e pressure to earn %ig% returns4 .%e ageing population profile and t%e esta lis%ment of pension fund sc%emes in t%e de$eloped +orld %a$e also contri uted to t%e s%arp increase in t%e supply of suc% capital4 &imultaneously capital controls t%at %ad een an important feature of t%e Bretton -oods system +ere gradually lifted after t%e collapse of t%e system and t%roug% t%e 018=s4 .%e a olition of controls fostered t%e de$elopment of a +%ole ne+ range of sop%isticated deri$ati$es designed to take ad$antage of t%e ne+ orderless financial +orld4 .%is resulted in an explosion of speculati$e acti$ity around t%e +orld3 a corollary of +%ic% is increasing exc%ange rate insta ility4 *ccording to estimates of t%e Mc(insey 'lo al Institute3 t%e total stock of financial assets traded around t%e glo e %as risen from @&A?3=== illion in 018= to @&A;?3=== illion y 011>4 .%e sum %as een forecast to %it @&A8;3=== illion y t%e year >=== BMichie 1999) !ast *sia %as een inundated +it% s%ort,term capital since t%e early 011=s4 /apan3 +it% %er large domestic surplus of sa$ings o$er in$estment %as een one of t%e ma9or sources4 "ollo+ing t%e di$ersion of in$estment funds after t%e Mexican crisis3 -est !uropean and Nort% *merican capital %as also een acti$e in t%e region4 It is not surprising3 t%erefore3 t%at !ast *sian economies +it% an excess of in$estments o$er sa$ings ecame an attraction for suc% funds4 *lt%oug% t%ese countries are ig sa$ers3 domestic in$estments are far greater4 )ence3 t%ere +as a need for foreign capital to fill t%e resource gap4 .%e fact t%at most !ast *sian currencies %a$e long een tied to t%e dollar +it% central anks inter$ening in t%e forex market to defend t%e preferred external $alue of t%eir respecti$e currencies %as ser$ed to preclude exc%ange risks4 .%is resulted in a tendency not to %edge foreign currency orro+ings3 as currency,rigidity could e intrepreted as implicit go$ernment guarantees against t%e risk of currency $olatility4 * large proportion of t%ese capital inflo+s +ere in t%e form of portfolio in$estments and speculati$e dealings including property and land4 -%ile interest rate differentials do pro$ide an incenti$e for s%ort,term capital to mo$e et+een countries3 its mo ility cannot e uni5uely attri uted to interest rate c%anges4 .%is explains +%y !ast *sia could attract muc% of suc% capital flo+s in spite of t%e fact t%at its interest rates +ere not t%at %ig%4 Rat%er3 t%ese portfolio in$estments +ere attracted y prospects of %ig% returns and not %ig% interest rates4 *t t%e same time3 regional economies could also orro+ from a road gi$en t%e %ig% ratings gi$en y international rating agencies4 .aking ad$antage of t%is3 institutions %a$e orro+ed s%ort a road and re,lent long at %ome Bat %ig%er ratesC4 .%is explains t%e s%arp increase in s%ort,term external de ts in some economies prior to t%e crisis4 &uc% a mismatc% represents anot%er important source of insta ility for t%e region4 -%at can +e learn from t%isG "or one3 unrestricted s%ort,term capital flo+s can desta ilise t%e system y creating u les to gro+ and urst4 In t%e a sence of international financial go$ernance3 unfettered capital mo$ements facilitated speculation and t%is +ill continue to remain a pillar of risks to t%e international financial market in t%e future if not%ing is

25

done to remedy t%e situation4 Large surges of capital +it% t%e potential risk of s%arp re$ersals can result in dramatic up%ea$als in economies3 e$en if fundamentals are considered sound4 .%is can e extremely desta ilising3 especially for de$eloping countries and t%e crisis ears testimony to t%is4 In Malaysia3 s%ort,term portfolio capital flooded t%e system in 011;3 +it% an important proportion destined for t%e stock market3 only to lea$e suddenly t%e follo+ing year4 O $iously3 t%e $alua le lesson +as not +ell,learnt as t%e ne+ unsustaina le uild,up from 011? sent stock prices soaring again despite declining price,earning ratios4 .%e fact is t%at many countries did not see capital inflo+s as a serious pro lem4 .%ey get upset only +%en capital flo+s out4 It is3 %o+e$er3 natural t%at +%at flo+s in one day +ill flo+ out some ot%er day4 Countries s%ould not li eralise t%eir capital accounts and t%en complain +%en s%ort,term portfolio capital suddenly flo+s out4 If s%ort,term portfolio capital is indeed desta ilising3 t%en per%aps control s%ould e imposed at t%e point of entry and not at t%e point of exit4 *s a matter of fact3 inflo+s can e 9ust as damaging as t%ey can distur t%e domestic financial market e5uili rium and t%ro+ t%e domestic monetary system out of gear4 .%is damage could e minimised y sterilising capital inflo+s4 .%e pro lem is t%at it may e difficult3 if not impossi le3 to determine if suc% inflo+s are actually s%ort, or long,term as some portfolio in$estments may e genuinely long,term4 Regardless3 financial capital is %ig%ly $olatile3 5uite unlike foreign direct in$estment B"DIC4 .%e argument in fa$our of any form of controls3 t%erefore3 s%ould only target financial capital and not "DI4 .+o $ery good examples are C%ile and Colom ia3 ot% of +%ic% %a$e imposed capital controls at t%e point of entry3 +%ere in$estors are re5uested y la+ to deposit a portion of t%eir capital +it% t%e central ank interest,free4 In t%e case of Malaysia3 t%e controls imposed +ere3 in fact3 5uite t%e opposite4 &uc% s%ould e 9ustified only as a temporary respite in an emergency situation in order for reforms to proceed4 It cannot e a long,term solution to t%e 6%ot,money7 pro lem4 In t%is sense3 t%ere is no+ a recognised need for a ne+ international order or some form of go$ernance frame+ork4 *ll t%is3 nonet%eless3 s%ould not amount to putting all t%e lame on foreign in$estors3 glo al forces and t%e s%ifting of responsi ilities to glo al odies4 Rat%er3 t%e recent crisis t%at s%ook t%e region can e partly attri uted to premature financial and capital,account li eralisation3 and t%e undermining of eac% economy#s financial and monetary go$ernance4

26

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Epilogue
!conomic %istorians +ill one day look ack and regard t%e closing decade of t%e PP Century as one +%ic% propelled &out%east *sia to its Kenit% of gro+t% efore plummeting t%e region into t%e dept%s of turmoil4 .%e fateful e$ents to+ards t%e end of t%e 011=s %a$e roug%t many in t%e +orld to re, consider t%e region as t%e paragon of economic gro+t%4 Nonet%eless3 t%is does not necessarily mean t%at t%e region is doomed economically4 Au contraire3 &out%east *sia s%ould remain a reser$oir of gro+t% into t%e next millennium4 )o+e$er3 t%e asis for t%is lies in t%e region#s +ill to regard t%e crisis as a %um ling experience and take ad$antage of t%is opportunity to institute t%e necessary reforms3 and concentrate on uilding a competiti$e and resilient system to face t%e c%allenges of t%e future4 Despite %a$ing maintained good fundamentals3 Malaysia +as far from spared4 Muc% like it +as in certain regional economies3 t%e 6$irtual IM" policy7 t%at Malaysia initially adopted did not produce t%e desired results4 Instead3 it led to a +orsening of t%e crisis situation due to t%e rapid contraction of t%e economy24 .%is prompted t%e go$ernment to c%ange its course and adopt an expansionary policy y t%e middle of 01184 Macroeconomic policy instruments +ere furt%er finetuned3 +%ile simultaneous efforts +ere undertaken +it%in t%e financial sector3 +it% an aim to strengt%ening economic and financial sector fundamentals3 and of restoring sta ility4 In spite of some positi$e de$elopments t%ereafter3 $ulnera ility to external de$elopments3 particularly repercussions stemming from t%e insta ility of t%e regional financial markets3 could not e contained4 In response to t%is3 Malaysia s%ocked t%e +orld y imposing selecti$e capital controls and pegging t%e ringgit to t%e dollar4 One year on3 despite muc% external pessimism and criticism3 t%e situation %as largely impro$ed4 !conomic fundamentals %a$e strengt%ened and t%e (uala Lumpur &tock !xc%ange is on an uptrend after plunging to an all,time lo+ earlier during t%e crisis4 &ome %a$e credited t%ese impro$ed conditions to t%e capital controls4 )o+e$er3 t%is may e difficult to assess as regional countries +%ic% %a$e not imposed any form of controls are all similarly experiencing an uptrend4 In any case3 t%e enefits seem to %a$e3 so far3 out+eig%ed t%e risks4 !$entually3 t%e reco$ery +ill depend not only on domestic factors ut on external factors as +ell4 Domestic initiati$es alone may not e as effecti$e if regional conditions do not impro$e as foreign in$estors tend to regard t%e region as an entity4 &trong macroeconomic fundamentals not+it%standing3 it must e seen t%at free3 uncontrolled s%ort, term capital mo$ements can actually e a disrupti$e force4 -%at %appened in t%e recent !ast *sian scenario is no+ do+n in t%e annals as %a$ing een roug%t a out3 partly3 y $olatile s%ort,term capital flo+s4 One cannot deny t%at t%ese unrestricted s%ort,term flo+s can e $ery desta ilising y t%e u les t%ey create4 @nfortunately3 little may e done3 if not to stem suc% inflo+s into an economy t%roug% controls4 .%ere is no+ a recognised need for a ne+ international financial
7

The deepening of the crisis, however, may have forced serious economic reforms.

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sur$eillance frame+ork +%ic% may allo+ countries to enefit from t%e ad$antages of li eralisation and glo alisation +%ile minimising t%e risks and negati$e aspects of t%e process4 Difficulties aside3 nonet%eless3 suc% an undertaking is not somet%ing to e anticipated in t%e immediate future4 In all3 capa le institutions and prudential regulations must necessarily complement strong fundamentals in t%e 5uest to a$oid a similar experience in t%e future4

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,eferences_____________________________________________________________________________
_

Ariff, Mohamed et al, 'Improved Management of the Financial Sector for Its Enhanced Stability and Support to Trade and Investment Flows', MIER, January 1998 _____ & Abubakar, Syarisa Yanti, 'Domestic Reforms and International Co-operation: The Malaysian Perspective', MIER, March 1999 _____, et al, 'The Implications of the Asian Financial Crisis on Capital Flows - Malaysia', MIER, March 1999 _____ & Wan Abdul Kadir, Azidin, Malaysian financial &n Economic Crisis & Recovery Prospects, _____, 'The Financial Crisis and Reshaping of the Malaysian Economy: Trends and Issues', MIER, 1999 _____, Wrestling with hot money , Star, The, 11 August 1999 _____, Banking on Banking Reforms, Star, The, 24 August 1999 Asian Development Bank, 'Asian Development Outlook 1998', Oxford University Press, Hong Kong Asian Development Bank, 'In the Eyes of the Asian Financial Maelstrom: Banking Sector Reforms in the Asian Region', March 1999 Asian Development Bank, 'Rising to Asias Challenge: Enhanced Role of Capital Markets', March 1999 Athukorala, Prema-chandra & Warr, Peter, 'Vulnerability to a Currency Crisis: Lessons from the East Asian Experience', March 1999 Bank Negara Malaysia (BNM) Annual Report 1997, 1998 Bnassy-Qur, Agns & Cadiou, Loc, Le Dollar en Asie: responsable, mais pas coupable, Le Monde, Paris, 30 Sep 1999 Bhagwati, Jagdish, 'Yes to Free Trade, Caution on Free Capital Flows', AWSJ Claassen, Emil-Maria, Financial Liberalization and its Impact on Domestic Stabilisation Policies: Singapore & Malaysia, Journal of the Kiel Institute of Economics,Tubingen, Germany, 1992 Dana Modal Berhad, 'Danamodal Factsheet', 1998 Dana Modal Berhad, 'Danamodal Core Process Analysis', 1998 Hassan, Tan Sri Ali Abul, 'Challenges and Prospects for Economic Recovery in Malaysia', December 1998 Higgott, R. & Phillips, N., The Limits of Global Liberalisation: Lessons from Asia and Latin America, CSGR Working Paper No.22/98, University of Warwick, January 1999 International Monetary Fund , 'Containing the Risks to the World Economy', 1998 Jomo, K.S., ed., Tigers in Trouble - Financial Governance, Liberalisation and Crises in East Asia, Zed Bks. Ltd., London, 1998 Krugman, Paul, The Myth of Asias Miracle, Foreign Affairs, November 1994 Lau, Lawrence J. & Kim, Jong-Il, The Sources of Economic Growth of the Newly Industrialising Countries on the Pacific Rim, Stanford University: Centre for Economic Policy Research Publication #295, 1992 Malaysian Government, White Paper 1999 Michie , Jonathan, 'Currency Speculation Need for Reform', The Star, Malaysia, 6 April 1999 MIER, Malaysian Economic Outlook, First Quarter 1997' _____, Malaysian Economic Outlook, Fourth Quarter Update 1998-1999 _____, Currency Turmoil and the Malaysian Economy - Genesis, Prognosis and Response, 1998 Piei, Mohd. Haflah & Tan, Tiangchye , The Asian Financial Crisis~A Study of Macroeconomic Policies & Policy Management in Malaysia, ADB/MIER May 1999 Rasiah, Rajah, 'Busting the Bubble: Causes and Consequences of the Southeast Asian Financial Crisis', National University of Malaysia, January 1998 Migneron3 Daniel3 6L#*sie confrontQe R l#urgence d#une rQforme monQtaire73 La .ri une3 Paris3 >? /uly 0112 Young, Alwyn, Lessons from the East Asian NICs: A Contrarian View, NBER Working Paper No. 4482, Cambridge, MA, October 1993 _____, The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience, NBER Working Paper No. W4680, Cambridge, MA, March 1994

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