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.
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.
