Macroeconomic Problem in Malaysia Assignment

Topics: Monetary policy, Inflation, Malaysia Pages: 11 (2951 words) Published: July 8, 2013
Introduction

Malaysia was created in 1963 through the merging of Malaya (independent in 1957) and the former British Singapore (West Malaysia), and Sabah and Sarawak in north Borneo, (East Malaysia). The first three years of independence were marred by hostilities with Indonesia. Singapore separated from the union in 1965.

As an emerging economy Malaysia has been a success. From 1970 to the mid-1990s its investment ratio was among the highest in the Asian region. This increasing investment shifted the economy from agriculture and mining to manufacturing and production of high technology electronics equipment. Because initial development was financed with public money, by the early 1980s growth was accompanied by increasing budget deficits and public debt. Today, exports (technology, oil) dominate the economy, and agriculture contributes only 10% of GDP, making Malaysia unique among developing countries.

1997-1998 CRISIS 1
Despite relatively favorable financial conditions in Malaysia in 1997, panic in the Southeast Asia region resulted in the collapse of the Ringgit from 2.6 to the dollar in July 1997 to 4.7 in January 1998. The Kuala Lumpur equity index fell from approximately 1000 to 300 and non-performing loans in the banking sector climbed to over 12 percent. Unlike most crises in developing countries, Malaysia did not have a short-term debt problem, experienced no excessive capital outflow, and was never forced to drastically deplete Central Bank reserves. Instead, the main reason for the steep decline in the ringgit was currency speculation in the offshore market located in Singapore.

The Malaysian government took action against this type of destabilizing speculation by first limiting to $2 million Malaysian bank currency swaps with non-residents in transactions unrelated to trade. The result, however, was a shift in borrowing to the Singapore offshore market (done purely for speculative purposes). The Malaysian government thus decided to make offshore ringgit transactions illegal in order to shut down commercial transactions with Malaysian banks. Also important is that these measures were not introduced under emergency conditions to control capital outflows, or to support unsustainable macroeconomic policies. Instead, the crisis was allowed to run its course, and changes were made under relative post-crisis calm. Rapid recovery in Malaysia has allowed the progressive removal of crisis-control measures as early as February 1999. Their success was confirmed by the fact that very little capital outflow occurred when the last of the controls were lifted in September 1999, an amount that actually flowed back in during the first quarter of 2000.the destabilizing Singapore market. In addition, measures were taken to prevent non-resident ownership of ringgit balances held abroad, making it impossible to settle ringgit contracts except through Malaysian banks in Malaysia. A final step toward insulating the domestic situation was the introduction of a fixed exchange rate (at 3.8 ringgit to the dollar).

Malaysia’s crisis response policies have generally been considered successful, and it is important to note that long term flows and FDI were not regulated, and the currency was always fully convertible for

CURRENT MACROECONOMIC SITUATION

GROWTH

With the exception of 1998, Malaysia has seen real GDP growth in each of the last seven years. In 2001, though, Malaysia experienced negative growth in nominal GDP, GDP/capita and real GDP/capita. The Ringgit’s appreciation against regional currencies, coupled with the 2001 world recession resulted in decreased exports and caused this GDP decline. According to Roger A. Arnold (2008), the gross domestic product (GDP) refers to the total market value of all final goods and services produced annually within a country’s borders. Based on the expenditure approach in computing GDP, a country’s GDP is the sum of its consumption, investment, government purchases, and net...

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