Malaysia Financial Crisis

Topics: Monetary policy, Inflation, Foreign exchange market Pages: 3 (925 words) Published: July 2, 2011
Examine whether the actions taken by Malaysia, since the Asian Financial Crisis of 1997, have lessened its vulnerability to destabilizing external shocks. INTRODUCTION
When the Asian financial crisis hit Malaysia, the impact was traumatic. There was economic and political turmoil. The stock market, the currency and the property market nearly collapsed. That in turn affected the overall economy. UMNO, the dominant political party in the ruling alliance, experienced political turbulence when Its charismatic deputy president, Anwar Ibrahim, was expelled from the party when he disagreed with the then president, Mahathir Mohamad, over, among other things, Mahathir’s rejection of loans from the International Monetary Fund (IMF). EXAMINING ACTIONS TAKEN BY MALAYSIA

When looking at the measures taken by Malaysian government it shows that indeed they narrowed its weakness to threaten external shocks. For example, the far most efficient action taken by the government of Malaysia to counter the crisis is the implementation of a fixed exchange rate regime from the previous free float exchange rate regime. The underlying factor that contributes to the crisis is the devaluation of Thai Baht which cause outcome effect throughout the Southeast Asia region. The devaluation of Thai Baht causes a loss of confidence in the region currency stability which in turn pressures the Ringgit to devalue as capital. Prior to the Asian Financial Crisis 1997, Malaysia was maintaining a free float exchange rate system. In a free float exchange rate system, Malaysia authority was able to enjoy a greater flexibility in implementing fiscal and monetary policy. Nevertheless, the Asian Financial Crisis 1997 has forced the authority to evaluate the viability of a free float exchange rate system when Malaysia was exposed to currency crisis. After much turbulence for a year, the authority found out that a stable and conducive environment for the implementation of fiscal and monetary policy...
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