The Crisis and Policy Response

National Economic Recovery Plan
Chapter 1


The Asian Contagion

Malaysia is caught in a severe and prolonged regional currency crisis that has swept across East Asia. The large-scale movement of funds out of domestic financial markets first started in Thailand before spreading quickly to neighbouring countries and South Korea. Faced with mounting financial straits that worsened during the crisis, three countries
- Thailand, Indonesia, and South Korea - turned to the International Monetary Fund (IMF) for assistance. The total bailout package amounted to US$118.6 billion, the largest ever bailout arranged under IMF.

The speed and severity of the contagion effects of the East Asian financial crisis caught many people by surprise. The depreciation of one currency set off corresponding depreciations in the regionís currencies. The currency crisis brought about the collapse of the stock market and asset prices. This, in turn, caused the exchange rate to fall further, as businesses with foreign exposure and people with access to local currencies, follow the trail of currency speculators to buy foreign currency. They do this as a way of hedging against future loss or even profiting from the currency gyrations.

The fall in the exchange rate and the value of stocks hit businesses hard, undermine the financial system, and inflate the size of foreign debt obligations. As a result, businesses in East Asia are badly affected, financial systems undermined, and the size of foreign debt obligations inflated. The crisis has demonstrated how closely the currency and stock markets in the region are interlinked and how the political and economic circumstances of neighbouring countries affect one another.

At the early stage of the crisis, foreign analysts and international fund managers had placed Malaysia in the same category with the other countries in the region. The currencies and stock markets were very closely coupled with those of neighbouring countries although there is no clear reason why this should be so. It has increasingly become less so now as they begin to recognise Malaysiaís much stronger economic and financial position, as well as our political stability and commitment towards economic recovery.

  • Crisis of Confidence

Since one reason for the currency crisis is the crisis of confidence, the restoration of confidence would be an important step to tackle the currency crisis. However, restoring confidence is as much a matter of perceptions and social psychology as of realities and economic fundamentals. It is imperative to quickly address the underlying problems - both real and perceived - that had set off the crisis.

When the economy goes into a steep slowdown, the problems faced by corporations will be compounded, and this will place pressure on the financial institutions. However, if the slowdown in growth could be minimised, the corporations and financial institutions could get into a self-reinforcing virtuous circle that would help to support further economic growth.

This Recovery Plan provides the framework for action to counter the negative effects of the currency crisis and adopt wide-ranging policy reforms for national economic recovery. It provides a diagnosis of the problem and offers concrete proposals for action. The specific measures for action address the need to bring stability to the ringgit, restore confidence, strengthen the fundamentals of the economy, continue the equity and socio-economic agenda, as well as revitalise the financial and real sectors.




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