Four economic cycles
1973-75 recession
1980-81 downturn
1985-86 recession
1997-98 recession
Successful for two critical reasons:
• Effective economic management
• Interaction between cyclical and structural factors operating within the economy
1973-75 recession
• The country was at its early stage of rapid economics expansion.
• Due to world oil crisis.
• But Malaysia was not badly hit compare to most OPEC because Malaysia was not totally dependent on crude oil as the main source of growth.
• In fact, the average growth rate for the years between 1971 and 1975 was 8.0 % per annum. Except 1974-75, the growth arte was 0.8%.
• General price level was relatively stable due to the followings.
- the secular deterioration in the Malaysian terms of trade, especially the sharp reduction in the real price of rubber, had a dampening effect on m money income and demand.
- The Malaysian Ringgit appreciated in relation to the US dollar.
- During the 1970s Malaysia also cushioned the impact of imported inflation by successfully shifting to cheaper sources of imports.
1980-81, 1986-86
• The two downturns were similar in the sense that they had the normal indicators of the business cycle.
- Slow growth
- Depressed external demand
- The trade –off inflation
1997-98
• Causes of economic crisis
Two arguments
• One blames poor economic fundamentals and policy inconsistency.
- According to the “Fundamentalist” view, the Asian crisis was caused by serious structural problems along with policy inconsistencies.
- Many Asian governments provided implicit guarantees to the banking system, which often engaged in lending practices that favored financially unqualified borrowers. This meant that the governments’ implicit guarantees that created a sizable “ contingent fiscal liability”.
• The other argues that Asia fell victim to a financial panic, where negative sentiment became self-fulfilling.
- Self-fulfilling pessimism of international lenders as the root cause of the crisis.
- A classic bank run. In a bank run, if enough inventors are suddenly seized with panic and demand immediate payment, then financial intermediaries are forced to destructively liquidate long-terms assets at great loss. The problem is there is no lender of last resort, who can step in to provide the necessary liquidity that will end the panic.
Regional Fundamental before the financial crisis
• Massive infrastructure development (table 4.1)
• Increasing FDI prior to the crisis indicating investors’ confidence in the region and Asian in particular. (Table 4.2)
• Rising consumer demand and income showed the strength of domestic markets in the region. (Table 4.3)
• Strong employment and minimum unemployment rate in the region (table 4.4-4.6)
• Expanding intraregional trade enhanced by increased integration of production basis and cross-border growth triangles. (table 4.10)
Malaysian Fundamental before the financial crisis
• Price pressures were absent
- CPI average 2.7 %; rate of unemployment was 2.6%. Organization of Economic Cooperation and Development (OECD) countries was 7.5%.
• Malaysia’s exposure to external debt was comparatively low at RM115.1 billion or 44.1 % of GNP at the end of June 1997, mostly long-term in nature.
• The overall public sector account had been in surplus since 1994.
• International reserves held at BNM as at June 1997, amounted to US$27.4 billion which was sufficient to finance approximately 4.3 months of retained imports, a level; considered satisfactory by international standards.
• The risk-weighted capital ratio (RWCR) of the banking sector was 12 % as at end of June 1997, exceeding the Bank for International Settlements (BIS) minimum standard of 8%.
• The continued governance of the nation by the same coalition of political parties since independence contributed to political stability and inters-racial harmony.
• The predictability and consistencies of government policies provided certainty to the private sector.
• The low incidence of poverty and the increasing size of the middle class contributed directly to economic growth in terms of their enhanced capacity to spend as well as to invest.
Conclusion: These fundamental strengths indicate that the real cause of the crisis was not the vulnerability of the Malaysian economy, especially financial sector, but calculated speculative attacks by certain fund managers.
• Approaches to vanquish the causes of economic crisis
Managing with NEAC policies
• The NEAC was established to make concrete recommendations to the government to arrest the worsening economic situations and revitalize the economy.
• Objectives
- Stabilize the Ringgit
- Restore market confidence
- Maintain financial stability
- Strengthen macroeconomic fundamentals
- Continue the socio-economic agenda
Managing with IMF prescriptions
IMF approach in the crisis-affected countries was to demand a tightening of fiscal policy based on two arguments.
• First, it argued that in the presence of rapid capital flight, these countries need to reduce domestic demand to narrow their current-account deficits. Tightening fiscal policy was an effective way to do this.
• Government spending needs to be cut to make room for the expected expenditure necessary to bail out insolvent banks.
In Malysia, the initial approach adopted contained some features of the IMF prescription for economies in the region, but they caused severe liquidity problems, reduced accessibility to credit and thus, adversely affected the performance of the private sector and in turn, contribute to strains on economy.
The givernment consequently decided to change its course of action by relaxing the fiscal and monetary policies in mid-1998.
Look at figure 4.5 for chronological details of IMF prescriptions.
• Effects of economic crisis to the economy
Economic Impact
- Towards the end of 1997, GDP began to slow down and registered a negative growth beginning the first quarter of 1998.
- Slower employment growth, and increased unemployment as well as retrenchment.
- Price pressures arising mainly from the depreciation of the Ringgit. CPI peaked at 6.2 % in June 1998.
- Private investment has generally contracted mainly due to uncertainties arising from volatile exchange rates, decline in both local and external demand, existence of excess capacity and tight liquidity position encountered since the onset of the financial crisis in July 1997.
- KLSE declined by 44.9 % between July 1 to December 31, 1997. hit 262.7 points on September 1, 1998.
- NPL increased.
Socio-economic impact
- Drastic decline in share prices and value of property and a negative wealth effect and severely affected the consumption pattern of Malaysians. The poor performance of KLSE also seriously affected the ability to procure financing through stock market.
- The increased in interest rates following the crisis brought further hardship to the public at large as well as business in terms of higher debt service commitments.
- Adversely affected the share of Bumiputra ownership in the corporate sector.
- The currency depreciation affected the capacity to pursue education abroad.
Managing with NEAC policies
• The NEAC was established to make concrete recommendations to the government to arrest the worsening economic situations and revitalize the economy.
• Objectives
- Stabilize the Ringgit
- Restore market confidence
- Maintain financial stability
- Strengthen macroeconomic fundamentals
- Continue the socio-economic agenda
1973-75 recession
1980-81 downturn
1985-86 recession
1997-98 recession
Successful for two critical reasons:
• Effective economic management
• Interaction between cyclical and structural factors operating within the economy
1973-75 recession
• The country was at its early stage of rapid economics expansion.
• Due to world oil crisis.
• But Malaysia was not badly hit compare to most OPEC because Malaysia was not totally dependent on crude oil as the main source of growth.
• In fact, the average growth rate for the years between 1971 and 1975 was 8.0 % per annum. Except 1974-75, the growth arte was 0.8%.
• General price level was relatively stable due to the followings.
- the secular deterioration in the Malaysian terms of trade, especially the sharp reduction in the real price of rubber, had a dampening effect on m money income and demand.
- The Malaysian Ringgit appreciated in relation to the US dollar.
- During the 1970s Malaysia also cushioned the impact of imported inflation by successfully shifting to cheaper sources of imports.
1980-81, 1986-86
• The two downturns were similar in the sense that they had the normal indicators of the business cycle.
- Slow growth
- Depressed external demand
- The trade –off inflation
1997-98
• Causes of economic crisis
Two arguments
• One blames poor economic fundamentals and policy inconsistency.
- According to the “Fundamentalist” view, the Asian crisis was caused by serious structural problems along with policy inconsistencies.
- Many Asian governments provided implicit guarantees to the banking system, which often engaged in lending practices that favored financially unqualified borrowers. This meant that the governments’ implicit guarantees that created a sizable “ contingent fiscal liability”.
• The other argues that Asia fell victim to a financial panic, where negative sentiment became self-fulfilling.
- Self-fulfilling pessimism of international lenders as the root cause of the crisis.
- A classic bank run. In a bank run, if enough inventors are suddenly seized with panic and demand immediate payment, then financial intermediaries are forced to destructively liquidate long-terms assets at great loss. The problem is there is no lender of last resort, who can step in to provide the necessary liquidity that will end the panic.
Regional Fundamental before the financial crisis
• Massive infrastructure development (table 4.1)
• Increasing FDI prior to the crisis indicating investors’ confidence in the region and Asian in particular. (Table 4.2)
• Rising consumer demand and income showed the strength of domestic markets in the region. (Table 4.3)
• Strong employment and minimum unemployment rate in the region (table 4.4-4.6)
• Expanding intraregional trade enhanced by increased integration of production basis and cross-border growth triangles. (table 4.10)
Malaysian Fundamental before the financial crisis
• Price pressures were absent
- CPI average 2.7 %; rate of unemployment was 2.6%. Organization of Economic Cooperation and Development (OECD) countries was 7.5%.
• Malaysia’s exposure to external debt was comparatively low at RM115.1 billion or 44.1 % of GNP at the end of June 1997, mostly long-term in nature.
• The overall public sector account had been in surplus since 1994.
• International reserves held at BNM as at June 1997, amounted to US$27.4 billion which was sufficient to finance approximately 4.3 months of retained imports, a level; considered satisfactory by international standards.
• The risk-weighted capital ratio (RWCR) of the banking sector was 12 % as at end of June 1997, exceeding the Bank for International Settlements (BIS) minimum standard of 8%.
• The continued governance of the nation by the same coalition of political parties since independence contributed to political stability and inters-racial harmony.
• The predictability and consistencies of government policies provided certainty to the private sector.
• The low incidence of poverty and the increasing size of the middle class contributed directly to economic growth in terms of their enhanced capacity to spend as well as to invest.
Conclusion: These fundamental strengths indicate that the real cause of the crisis was not the vulnerability of the Malaysian economy, especially financial sector, but calculated speculative attacks by certain fund managers.
• Approaches to vanquish the causes of economic crisis
Managing with NEAC policies
• The NEAC was established to make concrete recommendations to the government to arrest the worsening economic situations and revitalize the economy.
• Objectives
- Stabilize the Ringgit
- Restore market confidence
- Maintain financial stability
- Strengthen macroeconomic fundamentals
- Continue the socio-economic agenda
Managing with IMF prescriptions
IMF approach in the crisis-affected countries was to demand a tightening of fiscal policy based on two arguments.
• First, it argued that in the presence of rapid capital flight, these countries need to reduce domestic demand to narrow their current-account deficits. Tightening fiscal policy was an effective way to do this.
• Government spending needs to be cut to make room for the expected expenditure necessary to bail out insolvent banks.
In Malysia, the initial approach adopted contained some features of the IMF prescription for economies in the region, but they caused severe liquidity problems, reduced accessibility to credit and thus, adversely affected the performance of the private sector and in turn, contribute to strains on economy.
The givernment consequently decided to change its course of action by relaxing the fiscal and monetary policies in mid-1998.
Look at figure 4.5 for chronological details of IMF prescriptions.
• Effects of economic crisis to the economy
Economic Impact
- Towards the end of 1997, GDP began to slow down and registered a negative growth beginning the first quarter of 1998.
- Slower employment growth, and increased unemployment as well as retrenchment.
- Price pressures arising mainly from the depreciation of the Ringgit. CPI peaked at 6.2 % in June 1998.
- Private investment has generally contracted mainly due to uncertainties arising from volatile exchange rates, decline in both local and external demand, existence of excess capacity and tight liquidity position encountered since the onset of the financial crisis in July 1997.
- KLSE declined by 44.9 % between July 1 to December 31, 1997. hit 262.7 points on September 1, 1998.
- NPL increased.
Socio-economic impact
- Drastic decline in share prices and value of property and a negative wealth effect and severely affected the consumption pattern of Malaysians. The poor performance of KLSE also seriously affected the ability to procure financing through stock market.
- The increased in interest rates following the crisis brought further hardship to the public at large as well as business in terms of higher debt service commitments.
- Adversely affected the share of Bumiputra ownership in the corporate sector.
- The currency depreciation affected the capacity to pursue education abroad.
Managing with NEAC policies
• The NEAC was established to make concrete recommendations to the government to arrest the worsening economic situations and revitalize the economy.
• Objectives
- Stabilize the Ringgit
- Restore market confidence
- Maintain financial stability
- Strengthen macroeconomic fundamentals
- Continue the socio-economic agenda
Being able to acquire an income insurance if you are living in a country with an unstable economy is good. But, for the government to plot a solid reform is much better.
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