The Malaysian Crisis - Money, Banking & Capital Markets

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UNIKL BUSINESS SCHOOL

SEMESTER 4, 2017/2018

GROUP ASSIGNMENT

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EEB30203

MONEY, BANKING & CAPITAL MARKETS

CASE STUDIES

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SECTION: IB10

PREPARED BY

STUDENT’S NAME                                                                       ID NUMBER

• MOHD ADIB BIN ISMAIL                                                           62215217197
• ABDUL RAHMAN IMAN BIN ZAINURI             62215217172                              
• AMEER FAHIM BIN AMEER SHARIFFUDDIN                   62215217196

PREPARED FOR: (DR FAUZI ZAINIR)

DATE OF SUBMISSION: 27th DECEMBER 2017

1. What caused the financial crisis in Malaysia

In 1997, The Malaysian Crisis starts shortly after the Thai currency was floated and devalued sharply, there was a “contagion effect” on the Malaysian economy. The first effect was via the exchange rate. The Malaysian ringgit (RM) had for several years been relatively stable at around RM2.40-2.50 to the US dollar. It steadily depreciated to 2.80, then to 3.00, 3.20, 3.50, 4.00, 4.20 and reached a low point of 4.88 on 7 January 1998. For a while, it appeared possible that the 5.00 level would be breached. The drastic decline was significantly caused by speculation, as speculators sold the ringgit “short”. There were at least two mechanisms for this short-selling

The first mechanism the speculator sold the ringgit in the forward market at the current exchange rate with a view to delivering the ringgit at a future date or the second mechanism which the speculator borrowed ringgit in order to sell it presently and hold dollars. These actions contributed to the weakening of the ringgit as the demand for the US dollar increased. When the ringgit depreciated, the speculators could reap the profit.

Speculation on the ringgit was carried out not only in the local markets but also abroad as the ringgit was being traded in overseas markets, such as Singapore. The currency depreciation had several negative effects. Firstly, it increased the burden of external debt servicing. At the start of the crisis, the country’s external debt servicing position was rather comfortable. However, the depreciation increased the debt burden in that the debtors had to pay more in local currency amount; several large Malaysian companies that had taken foreign loans made large losses. Secondly, the continuous changes in the exchange rate were very destabilizing as traders and enterprises were unable to conduct business in a predictable way as the prices of imports and exports (in local currency terms) kept changing. Thirdly, the prospect of continuous decline in the ringgit’s rate contributed to a sharp fall in the value of shares in the stock market and the inflow of foreign portfolio funds in the stock market was reversed.

Due to the serious adverse effects of currency depreciation, stabilizing the ringgit became perhaps the over-riding concern of the policy makers during the crisis. Four of the five countries which is Indonesia, Thailand, Philippine and Korea went to IMF for assistance and followed the IMF designed economic program. This program is to ensure the rebound and assistance for their financial crisis. The only country that did not use the assistance of IMF is Malaysia.

1. Why did the Malaysian government impose currency and capital control

1. Were the controls necessary?

Yes, there are many good results gained from the controls made by the Malaysian government. The Malaysian shows that if a developing country reaches such a policy conclusion, it is possible to attempt adopting policies to limit financial openness through an array of policy tools that could include some capital controls, regulations to discourage or prevent speculation, and a fixed exchange rate system. The policies that may have been appropriate for Malaysia may not be as appropriate to other countries either because they have different conditions based on economic, political, institutional and many more or because they have different goals to be achieved and has their own vision during the crisis itself.

Having policy space and flexibility is important to a developing country in this term is shown on the Malaysian capital and currency control. The Malaysian experience also shows that if a country is able to avoid turning to the IMF, it can be free of the straightjacket of the IMF’s mainly one-size-fits-all policies, and can choose its own policies and also change them if they are found to be unsuitable. Malaysia initially took on several elements of the IMF fiscal and monetary policies but when these damaged the real economy the country was able to change to a different approach. Thus the controls are necessary to prevent further destruction and ensure stability in long term.

B) Were they effective?

Of Course the controls were effective and it is a play safe term as Malaysia was able to prevent certain disaster to ever happen in the Malaysian economy. One of the economy analyzer has analyzed the capital controls imposed in Malaysia in September According to Tamirisa (2006) during the crisis in 1998 in macroeconomic terms, these controls neither yielded major benefits nor were costly. At the same time, the stock market interpreted the capital controls (and associated events) as favoring firms with stronger political connections, and some connected firms reportedly received advantages immediately following the crisis.

There are alternatives to the IMF’s loan conditionality policy package that can possibly be formulated and tried out. The Malaysian case shows that such an alternative approach exists, and can be applied in a relatively successful manner with good results.

In a situation where there are many complex trade-offs, it is useful to “think outside the box” and seek other policy tools. In this particular event, the think outside the box policy are undoubtedly effective in managing the crisis itself.

2c. What were the banefits and cost of the Malaysia capital and control?