Transcript Malaysia`s Currency Crisis

The East Asia Currency Crisis
The Malaysia’s Case 
Presented by:
Pedro A. & Samen Son
Agenda
A quick look at Malaysia's history
Malaysia's path before the crisis
Malaysia's Economic Situation before the Crisis
Malaysia's Economic Decline
Causes to the Malaysia's Economic Decline
The Crisis
The IMF Intervention
Malaysia's Policy Taken
Conclusion
Questions & Comments (please leave them to the end)
A quick look at Malaysia’s history
• 1957 independence (from Great Britain).
Malaysia’s path
• 1955 The Import substitution industrialization
(ISI) strategy
• 1970 New Economic Plan (geographic integration/land reform)
▫ Poverty rate 49 % in 1970; 17% in 1990
• 1971-1975 Second Malaysia Plan (export-oriented
industrialization; FDI)
▫ Electronics/technical textile/apparel
• 1981-1985 Fourth Malaysia Plan (public sector
investment/Heavy Industries Corporation of Malaysia)
• 1990 New Development Plan
Economic situation prior to the crisis
• 4 decades after Malaysia’ independence
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Industrial oriented economy
Manufactured exports more than 80% of exports
Foreign direct investment (Japanese firms)
Malaysia’s performance caused by external factors
Economic situation prior to the crisis
Con’t
Economic Decline
• A decline in export growth (caused by the East Asia Crisis)
• High concentration on certain manufactured
goods (as shown on next slide; risky in cyclical turndowns)
Economic Decline
(con’t)
• High degree of ownership as FDI in Malaysia
• Industrial activity in final stage (relative t0 design, development, etc)
Economic Decline
(con’t)
• Human resource (relatively small investment)
Causes to the economic decline
• The sharp appreciation of the dollar
• June 1995 – April 1997 from 85 yen/dollar to
127 yen per dollar.
• East Asian currencies were pegged to the dollar
• Malaysia’s competitiveness slowed
Causes to the economic decline
• Other argue from another perspective
▫ Devaluation of the Yuan against the US dollar (in
1994)
▫ Tax rebates on exports
▫ Therefore, China was the first domino to fall
• Other arguments
▫ Slow down of demand for electronics (1995-96)
The crisis
• “Asset price bubble and over inflated market”
• Investors predicted “untenable exchange rate
and asset markets.”
• Capital disinvestment
▫ Currency devaluation
▫ Financial crisis!
 High unemployment
 Deep recession
The IMF intervention
(The Washington Consensus)
• 1980’s & 1990’s Open capital markets
• Exchange rate stability
• Higher interest rate to attract investors
▫ Bankers & investors poured money in real estate
and equity shares
• Privatization
Malaysia’s policy taken
• Banking and Financial Institutions Acts of 1989
▫ Restrictions on foreign borrowing
• Malaysia’s external liabilities did not exceed its
foreign exchange reserves
• Malaysia did not submit to IMF conditionalities
• The government played an important role in
foreign borrowing
Conclusion
• Developing countries should monitor their
economic policies independently from external
organizations such as the IMF
• The government should play important roles
when it’s necessary like the case of Malaysia’s
government during its crisis
Questions?
• Comments
Thanks for keeping your questions and comments
until here