The financial crisis was first felt in Thailand on
July 2, 1997, in which later spread to Malaysia, Indonesia, Philippine and
Singapore; not forgetting Hong Kong, Taiwan, Korea, Japan and China. None of
the countries in East Asia were spared from the impact of the financial crisis.
A year later, the financial crisis had spread its wrath to Russia and Latin
America, in which it causing a sharp depreciation in their currency values and
collapsing the stock market. This had caused a decline in exports, and resulted
in a slowdown of economic growth, as well as an alarming rate of unemployment.
Moreover, the East Asian region itself was also suffering from internal
economic problems which caused a lot of companies and enterprises to file the
bankruptcy. The governments concerned had no effective means of mitigating the
impact of the financial crisis (Yu, 2007).
The Malaysian government had resorted to public
borrowing, which means the government had to find economic sources from
borrowing or public debt, essentially through internal or external sources of
money, capital, man- power, expertise and so forth. The internal sources of the
Malaysian government in public borrowing were from the Central Bank as well as
Financial and Commercial Banks. Moreover, the Malaysian government had
introduced Danaharta, Danamodal, Merger of Financial Institutions, Corporate
Debt Restructuring Committee, and Bond Market in order to overcome the financial
crisis internally. However, the internal sources were not enough to over- come
the impact of financial crisis and this forced the Malaysian government to
resort to external borrowing.
According to (Hadan, 2003),
the Malaysian economy had largely been in a good condition since independence.
In recent years, it had enjoyed full employment, considerable stability in the
price level, and high growth, with the average rate being 8.7 % during the time
period of 1990-1997. Malaysia, even with its small mass, was ranked as the 35th
top country in 1997 with developmental momentum. This scenario showed that the
recovery plans geared towards battling the crisis was successful, as Malaysia
stands strong in the eyes of the world reference to the size of both the
aggregate and per capita GNP.
It essentially was a trading country, in which
exports and imports played a major role in the progress of the economy. Thus,
the economy was highly open, and was much susceptible to external disturbances.
The foreign capital had continuously supplemented domestic savings in order to
sustain high investment rates, to bring forward growth. Malaysia wanted to
retain the advantage of its achievements in economic stability, but it was no
easy task, especially because of the international economic policies had
assumed political overtones. The high performance of the Malaysian economy that
was maintained over the decades, without markets or technology or even the core
capital being local, cannot be undermined. However, in 1997 the financial
crisis came to light, and essentially being a short-term phenomenon, it caused
the crash of the Malaysian economy.
Among the factors that caused the financial crisis in Malaysia were
speculative attacks, deficiencies in risk management, form of corporate
governance and equity markets, and the legal infrastructure (Colin, 2003).
The Malaysian economy was vulnerable due to the
unsustainable pace of economic growth and over-valued exchange rates. The
relationship between firms, government and banks in Malaysia in the financial
crisis period cannot be describe as good compared to other Asian countries.
There was no clear policy on directed lending to big firms, and to that extent
one cannot say that the financial constraints on big firms were weak. The
government came out with a high growth policy based on a high ratio of
investments to gross domes- tic product complemented with the promotion and
support of certain mega projects, which led to implicit assumptions by lenders
that the government would not let those projects fail, which was helped by
lending decisions by bankers based on not only a project’s cash flow but also
on collateral and implied government support. The over-investment was fuelled
by an aggregated demand to outstrip aggregated supply, with a consequently
persistent external deficit. Moreover, it had also led to a poorer cash flow
and more problems of loans. Later on, the deficiencies in risk management
caused by the financial crisis had also affected the Asian region, including
Malaysia; with huge mismatches between the asset and liabilities of enterprises,
leading them to assume excessive liquidity, interest rate and currency risks.
The currency mismatches had also happened in Malaysia, with the exchange
control regime requiring approvals for foreign currency borrowing. Several
prominent corporations were allowed to raise foreign currency loans, although
they only had ringgit cash flows. Due to the sharp ringgit depreciation, these
corporations were faced with massive foreign exchange losses or insolvencies
because of their currency mismatches and inabilities to hedge exposures.
Moreover, the banking system in Malaysia was very risky and this caused bad
macroeconomics.
It was an explosive mix for any corporate entity
which had over-borrowed and assumed too much maturity period or currency
mismatches. The high risk nature of banking in distinction to fund management
had risen from its high gearing and massive asset liability mismatches, and in
particular, from its tendency to borrow for a short period and lend for even
longer. The over- dependence on banks in Asia was caused by their
over-protection, as well as by the over-regulation of capital markets, and had
also affected the Malaysian financial system. This had caused the
under-development of non-banking financial institutions, capital markets, and
risk management products, risk intermediaries, trading and market-making, which
had functioned under inconsistent macroeconomic policies (Colin, 2003).The
form of corporate governance and equity market was another factor that caused
the financial crisis to occur in the Asian region. Asia was characterized by a
concentrated shareholdings system. Non-competitive product markets and weak
legal protection as well as governance by large share- holders rather than
managers had reduced opportunities for managements to specialize, poor
diversification of investments, and increased risks of expropriation of outside
shareholders by insiders. The concentrated shareholding had resulted in a
less-developed equity market. In Malaysia, the equity market was very sizeable (Colin, 2003).
The news of the outbreak of the regional crisis of
corporate governance breakdowns, and the weak responses to these regulators had
led to a huge stock market sell-down. The problem was compounded by new rules
on scrip delivery which was imposed to check the sell-down, even though these
rules were scrapped later on. However, the initiatives taken to facilitate the
development of suitable mechanisms for improved corporate governance were taken
only much later, and doubts persisted on issues related to enforcement. Lastly,
the legal infrastructure system in Asia, and more specifically Malaysia, was
plagued by inadequate reliance on markets due to its weak infrastructure in
private contracting, which in turn was attributed to poor laws or weak
enforcement of those laws. The investment decisions were based on the
relationship model rather than on market prices, whereas contracts need not
manage the supply of capital relative to investment opportunities, which were
limited. In order to protect their interest, foreign lenders to Asian
corporations and banks invariably made short-term loans; relying on the threat
of not rolling over the loans to ensure borrowers serviced the latter. When the
Asian economic crisis occurred, a majority of the lenders took back their loans
and this caused the capital to outflow without any control. This was considered
to be a rational response by the lenders in taking their time and going to
courts to enforce their rights; given the poor laws and weak enforcement (Colin, 2003).
The contagion was considered another culprit in the
situation. It did play a role, but not entirely within the suffering economies.
It was located outside, among the foreign fund managers. Here, the theoretical
links between stock prices and exchange rates the literature provides become
completely obliterated. Once the managers were convinced that the exchange rate
was out of what they perceived as its equilibrium value, one way speculative
action was expected [Kawai (2000), p.14]. No less than US dollars108 billion
left the region within first six months of the crisis. The herd behaviour of
local speculators did aggravate the situation in the stock market but had
little to do with the chaos in currency trading.
The financial crisis had an impact on the economy of
Malaysia. During the financial crisis, the value of the ringgit had declined.
Previously, in April 1997, the ringgit was equivalent to 2.42 of the U.S.
dollar, whereas later on the value of the ringgit against the dollar
depreciated by almost 50 per cent, hitting a high of RM 4.88 to the U.S. dollar
on January 7, 1998 (Mahathir, 1999). Besides that, the composite index (CI)
of the Kuala Lumpur Stock Exchange (KLSE), which was the third largest stock
exchange in the region after Tokyo and Hong Kong, fell precipitously from
1,077.3 points in June 1997 to 262.7 points on September 1, 1997 (Syarisa, 2002). Between July 1997
and mid-January 1998, approximately U.S. $225 billion of share values were
wiped off and between July 1, 1997 and September 1, 1998, market capitalization
in the KLSE fell by about 76 per cent to RM 181.5 billion. In the end, Malaysia
experienced the biggest stock market plunge among the Asian countries amid the
crisis.
The financial crisis had also caused the real sector of the economy to
feel the negative effects of the crisis. Weak stock prices, the property market
slump, and the net contraction impact of the ringgit depreciation together led
to a negative wealth effect, which resulted in a general contraction of
domestic demand. Consequently, domestic-oriented industries, such as the
construction and services sectors, were severely hit by the economic crisis.
Meanwhile, the increase in non- performing loans (NPLs) of the financial sector
was reflected in a sharp down- turn in borrowing and financing, bringing about
tight liquidity (Syarisa, 2002).
According to (Samuel, 2001), there were several actions taken by
the Malaysian government to overcome the financial crisis during 1997/1998,
such as using the extent of the current recovery, restructuring in the
financial and corporate sectors, the role of selective capital controls, and
the short to medium term outlook.
In 1998, Malaysia’s current account surplus was RM34
billion or 13% of the GNP (Gross National Product). Strong external sectors
were reflected in the improved international reserves position such as in
August 1998, in which Malaysia had reserves of US20.2 billion, and these had
increased to US31.7 billion in July 1999. Besides that, the level of interest
rates had also decreased significantly.
For example, in June 1999, the base-lending rate was 7.24% as compared
to an all-time high of 12.27% in June 1998. It meant that the crisis had not
recorded a higher impact in the inflation rates in Malaysia. The consumer price
index (CPI) increased from 2.7% in 1997 to a high of 6.2% in June 1998.
The next plan involved two phases of the reform
process, which was stabilization and reformation. In terms of the reformation
process, several agencies were established to face the financial crisis such as
Danaharta which had objective to purchase the non-performing loans (NPLs) and
Danamodal to recapitalize financial institutions in the stabilization phase.
The reformation phase consisted of corporate sector restructuring (Corporate
Debt Restructuring Committee), merger of financial institutions, and the
development of the bond market.
Danaharta, an asset management company, was
established in June 1998. Its main objectives were to remove NPLs from the
balance sheets of financial institutions at fair market value and to maximize
their recovery value. This will free the financial institutions from their
debts that had prevented them from carrying out their intermediation functions.
Danaharta successfully completed the first phase of its mandate; to deal with
NPLs. Later, Danaharta had acquired a total of RM 23.1 billion NPLs, amounting
to 31.8% of the total NPLs in the banking system.
Danamodal had injected RM6.4 billion into 10
financial institutions. As a result, the capital adequacy ratio of the banking
system increased to 12.7%. The capital injection was accompanied by absorption
of losses by shareholders through reduced shareholding in the institutions,
change in the composition of the boards of directors and/or change in the
management. Danamodal had also appointed their representatives in the recapitalized
institutions to ensure that these institutions were managed prudently and
efficiently as well as to institute changes that will strengthen the
institutions. Danamodal’s influence on the recapitalization of financial
institutions accelerated the institutional merger process.
The plan to merge 58 financial institutions into 6
groups, announced on 29 July, was an important component of financial sector
restructuring. This initiative was consistent with the earlier plan of
financial institutional mergers, which was announced at the beginning of the
crisis. Currently, the merger timetable was accelerated, and the restructuring
was more comprehensive. The 6 banking groups had merchant banking and
securities trading, in addition to commercial banking and financial company
activities. There was an overall agreement that bank mergers were necessary as
it would prepare the domestic banks for the eventual opening of the financial
services.
The CDRC had shown some progress, but restructuring
of the corporate sector remained slow. The CDRC sought to assist companies to
restructure without governmental support. Progress had been slow because the
process needed the agreement of all creditors. Banks, in particular, had been
reluctant to settle without full repayment. Negotiations had therefore been
long because even disagreement from one creditor would jeopardize the whole
process.
As Malaysia
was expected to resume its growth after the crisis, it was important to develop
an environment where capital can be mobilized to finance long-term investment
and to provide a better match between risks and returns. Thus, the development
of a bond market was viewed as a priority because it served as an alternative
source of raising capital. In view of the importance of this issue, the
Malaysian government had established a committee to expedite the development of
the bond market.
The SCC was a measure to deal with a situation of
extreme uncertainty. Its primary objectives were to bring stability in the
exchange rate, and regain control of monetary policy. It had helped to lower
interest rates, and support a fiscal stimulus such as liquidity in which it fuelled
the domestic economy. It had also provided a shield for carrying out reforms,
particularly banks’ recapitalization. Moreover, contrary to some expectations,
FDI had continued to flow in. Critics had predicted that Malaysia would use SCC
to relate the economy, and bail out companies.
The return to growth came from external sectors,
which was a result from the strong US economy, as well as the recovery by Asian
economies. Thus, even if there was a threat of potential weaknesses from the US
economy, the revived Asian economies were most likely to counter balance any
slack of export demands from the US market. Furthermore, the intra-regional
trade forms a substantial portion of the Malaysian export and the recent
recovery of the Japanese and other Asian economies would benefit Malaysia. The
performance of Malaysia’s external sector shows that Malaysia’s exports were
very competitive. The rate of Malaysia’s export growth was very much higher
than the other East Asian economies.
This was one of the approaches that were taken by
the Malaysia government in order to overcome the financial crisis. The NEAC was
establishing 1998 as a consultative body to deal with the immediate issues of
tackling the Asian Financial Crisis in 1997. It had been instrumental in
turning the economy around through pre-emptive strategies to counter the
adverse impacts. Some of NEAC’s objectives were to stabilize the ringgit, restore
market confidence, maintain financial stability, strengthen economic
fundamentals, continue socioeconomic agenda and restore sectors badly affected
by the crisis (Mahathir, 2003).
This was another approach that was taken by the
government in facing the financial crisis of 1997/1998. The National Economic
Recovery Plan provided the opportunity for economic fundamentals to reassert
themselves. Allowing for the lagged impact of the measures, Gross Domestic
Product expanded by 4.1% in the second quarter of 1999. The easier monetary
policy led to a considerable easing of the liquidity crunch. From the macro
perspective, a more important development was the improvement in both consumer
and business sentiments (Mahathir, 1999).
There are various external resources that can be
used as a tool to help countries in crisis such as International Monetary Fund
(IMF) and World Bank. Countries such as Thailand, Indonesia and South Korea
viewed IMF as their final way to resolve their financial problem. This was
because they had no other way out, although they all knew about the
consequences of relying on IMF; such as they must follow the conditions given
by IMF, and IMF will take over the decision making on their finance over the
years, until they were able to pay back the loans to the IMF (Khor K, 1998). However, Malaysia
had thought out of the box and had its own solutions. Malaysia preferred to use
World Bank as their external resource rather than IMF which could be damaging
in the future. Malaysia had collaborated with World Bank in order to maintain
the economy of this country. For example, World Bank had launched several
missions to enhance Malaysia’s economy. A World Bank mission visited Malaysia
in August 1999 to update the information on the Strategic Policy Review
process. A previous mission in May updated progress in financial and corporate
sector restructuring, identified outstanding and emerging issues related to
restructuring, and discussed the corporate and financial restructuring aspects
of the current Country Assistance Strategy.
The Malaysia Country Assistance Strategy (CAS) was approved by the World
Bank in March 1999 following a series of consultations with government
officials and a broad spectrum of organizations representing the civil society.
The CAS outlined a number of performance triggers that would guide the Bank's
lending programme in the coming years. The mission found that the government
authorities acted quickly to establish an institutional framework for financial
and corporate restructuring, and progress was note- worthy. The CAS outlined a
base case programme of investment loans focusing largely on the social sectors.
Financial sector restructuring loans were not anticipated under this base case
scenario. Nonetheless, a robust programme of analytical work, policy advice,
selective technical assistance, and country dialogue was envisaged in the CAS,
particularly in the areas of financial and corporate restructuring, medium-term
competitiveness and social issues. Both the impact of the crisis and
medium-term challenges were analyse in detail in a Malaysia Structural Policy
Review, which served as an instrument for the Government and the Bank to
monitor Malaysia’s performance over the CAS period (Malaysia, 2000). Another World Bank mission was
launched in March/April 2000 for a Strategic Policy Review monitoring mission,
in which it helped to gauge the progress in the financial and corporate sector
reform.
In August 1999, the Inclusive Financial System (IFC)
organized a mini-seminar in Kuala Lumpur with Malaysia’s private firms. The IFC
subsequently received requests to consider participating in several high
technology ventures, two corporate restructuring proposals, and a recycling
project. Malaysia had a well-developed financial market, and local currency
financing was preferred by many companies. In this context, IFC's strategy was
to;
1. Support
the rapidly evolving high-tech sector through non-traditional sources of financing in Malaysia, such as venture capital.
2. Support
financial institutions that provide assistance to Small and Medium Enterprises (SMEs) including leasing
and venture capital funds.
3. Provide
direct support to SMEs.
The
World Bank assisted the Malaysian government through several channels. The
Education Sector Support Project provided funding to a continuous core program
in basic education, and supported polytechnic education to provide skilled
technicians for the medium-term economic recovery, as well as efficiency
improvements through further staff development and institutional strengthening.
Implementation was done on schedule.
Japan had set up
a short term financing facility worth US$2.5 billion for Malaysia. The facility
served as a standby for the government should the need arise and was aimed at
supporting credit- extending schemes intended to promote economic activities in
Malaysia, such as trade financing, and small-and medium scale enterprise credit
line.
Ten years after the
economic crisis of Asia, countries that were affected by the crisis had been
recovering by embracing the free market and globalization. Asia was one of the
most dynamic regions in the global economy. Malaysia’s economy and financial
system was at the strongest position after a decade of the financial crisis.
Malaysia had greater economic flexibility to shift to new areas of growth, and
thus, sustained the developmental momentum. Economic growth was achieved with
pricing stability, low unemployment and strong external balances. The level of
savings remained high at 37 per cent as a percentage to the GDP, while the
level of external reserves remained strong at US$91 billion.
As a conclusion, this paper has discussed the
financial crisis that affected the Asian countries. To overcome this crisis, the government had
taken several steps such as the establishment of Danaharta and Danamodal. Ten
years after the financial crisis, the countries that were most affected by it
were recovering well. In the period of 2006 to 2007, the Malaysian economy was
stronger due to the state demand. Growth was achieved by low inflation climate
and low unemployment rate. Improving and maintaining economic freedom was the
only reliable way to generate positive cycle of economic growth and prosperity.
Thus, Malaysians should be proud of the government’s initiatives for the
successful financial packages for our country.
7.
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