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The Malaysian Financial Crisis: Economic Impact and Recovery Prospects

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The Malaysian Financial Crisis: Economic Impact and Recovery Prospects
The Developing Economies, XXXVII-4 (December 1999): 417–38

THE MALAYSIAN FINANCIAL CRISIS: ECONOMIC IMPACT AND RECOVERY PROSPECTS
MOHAMED ARIFF SYARISA YANTI ABUBAKAR

I. INTRODUCTION to the crisis, Malaysia had been dubbed as one of the miracle economies in East Asia owing to its maintenance of high growth rates averaging 8.9 per cent during the period 1988–96 in addition to low inflation rate of about 3–4 per cent per year. Moreover, the increasing emphasis on manufacturing, and electronics in particular, ensured high employment rates for the country. From July 1997 however, Malaysia began attracting more international attention not for its extraordinary economic performance, but for its entanglement in a major regional economic crisis. At the outset, for the more pessimistic observers it was already doubtful whether Malaysia’s target to become a developed country by the year 2020 would still be achievable. After all, for the first time in years, the external value of Malaysia’s currency, the ringgit, shrank by nearly 50 per cent while the stock market contracted by even more at about 60 per cent. The ringgit fell from an average of 2.42 to the U.S. dollar in April 1997 to an all-time low of 4.88 to the U.S. dollar in January 1998. The composite index (CI) of the Kuala Lumpur Stock Exchange (KLSE) which had been the third largest stock exchange in the region after Tokyo and Hong Kong, fell precipitously from 1,077.3 points in June 1997 to 262.7 points on September 1, 1997. Between July 1997 and mid-January 1998, approximately U.S.$225 billion of share values were wiped off. Before long, the impact of the financial crisis was being felt in the real sector as evidenced by business closures, retrenchments leading to high unemployment, and increasing inflation levels. For the first time since 1985, the Malaysian economy experienced a recession, contracting by 6.7 per cent in 1998. By nearly all accounts, the current downturn is worse than that experienced by the



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