Malaysian Experience In Asia Financial Crisis

The Financial Crisis In Malaysia

During the Asia financial crisis in 1997, Malaysia saw its long term program to build Malaysia economy development suffer under the onslaught of currency devaluation. The currency devaluation affected the stock market so badly that Malaysia witnessed first hand the consequence of short-term money propping the stock market. There are always people to ride on a bubble. The short-term capital investors were no exception, when the ringgit denominated share asset was affected by currency devaluation everybody wanted to jump ship and dumped their ringgit assets.

The situation was exacerbated by the USD becoming stronger based on US monetary situation. The US interest rates were rising and the USD appreciated against all East Asian currencies on its own accord. The currency speculators saw an ideal situation. The ringgit depreciated by half against the USD.

The Malaysia's Specific Approach

Malaysia found the IMF proposal too difficult to absorb. The real GDP had suffered and to revive the economy there was a need to keep interest rate low. Higher taxes and lower government spending will send the economy even further down. The floating exchange rate was not helping the ringgit. However, Malaysia had good exports and enough foreign reserves. It had enjoyed good foreign direct investments which were long term capital infusion to the economy. It decided that it will be too painful to adopt IMF strategies and defending the ringgit at such a cost was though of as too high a price to pay.

Malaysia rejected the IMF offer of financial help and instead resorted to fix its currency exchange rate at RM3.8 to the USD. To stop the influence of oversea ringgit, especially that are deposited in Singapore banks it decided to make ringgit held oversea worthless after a certain date. This would stop any speculation in the ringgit outside Malaysian borders. It also decided to put some capital controls to halt any short term movement of funds, which cannot be taken out of Malaysia for a period of one year. The intention of the capital control is to immediately stabilized currency fluctuation and to revive the domestic economy. Malaysia mobilized all its internal resources to finance it recovery programmes.

This approach brought back stability to the ringgit. People knew how much they will get for their trade with Malaysian importers and exporters knew how much they will get for their exports. Short term money movements were halted. Long term foreign direct investors were protected to ensure the continued flow of FDI into the country. The government has ensure that the ringgit would continue to be readily convertible to foreign currencies for trade purposes and for direct investment by foreigners. This approach has brought success in managing the financial crisis in the short and medium term strategy.

Malaysia subsequently eased its currency controls in February 1999 when it enacted a graduated exit tax for any transfers of capital by investor before the year was up. Similarly, transfers were allowed without levy for trade purposes and for long term capital investment. Malaysia has subsequently lifted the capital control.