Measures Taken by the Malaysian Government During the Asian Financial Crisis in 1997

Topics: Monetary policy, Debt, Malaysia Pages: 6 (1869 words) Published: October 5, 2010
Measures taken by Malaysian Government during the Asian Financial Crisis in 1997. There are numerous measures taken by the Malaysian Government during the Asian Financial Crisis in 1997. Nevertheless, in this paper, we only summarize the important and significant measures taken by the Malaysian Government. A more detail information will be revealed in the appendix added. Measures Taken by the Malaysian Government during the Asian Financial Crisis 1997: I). Fixed Exchange Rate Mechanism (Pegged Currency)

The far most efficient measures 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 repercussion 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 flight happen. 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 is vital. Therefore, Government of Malaysia decided to convert from a free float exchange rate to a fixed exchange rate regime on 2 September 1998.

Persistent currency attack and speculation activities have caused turbulence in the foreign exchange market and in turn impose adverse impact on the aggregate economic activities. Currency stability will provide much needed sentiment boost for the economy while calling an end to the currency speculation activities. Devaluation of ringgit and pegging Ringgit to a reasonable level will bring an abrupt end to the speculation activities and also boosting Malaysia export competitiveness. This will also helps to create an environment that is conducive for a revival in investor and consumer confidence and facilitate economic recovery.

Overall, the exchange control measures resulted in greater stability in the currency and stock markets and the financial system, as well as revival in domestic consumer and investor confidence. Although the economy continued to contract in the second half-year, on a year-to-year basis, the fundamentals had begun to strengthen towards end-1998.

II). Form Various Task Force Agencies
Prior to 1997, bad lending practices among banks and financial institution in Malaysia were very common. This condition and the rapid growth from the past few years which has inflated the asset prices only exacerbate the financial crisis in 1997. At one time, Malaysia financial institutions non-performing loans stood at record high of 14%. In this view, the skyrocket non-performing loans might bankrupt those weak financial institutions which would impose irreversible impact on Malaysia Financial System. Strong confidence and sentiment in the financial system was the cornerstone of any economy in the world. In effect, Malaysia government has to take proactive measure to counter this possible threat to the economy. * Corporate Debt Restructuring Committee

Corporate debt default was also the prevailing problem at that time. A huge amount of domestic firms borrowed money that denominated in other foreign currency (mostly U.S Dollar). This is from the fact that loans can be acquired more easily and cheaper in foreign source. However, those firms didn’t discount in the factor such as exchange rate fluctuation which would impose adverse implication to them. They simply left their risk exposure to...
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