The Crisis and Policy Response

National Economic Recovery Plan
Chapter 1


Currency and Stock market Crises in Malaysia

Malaysia's impressive decade-long growth record came to an abrupt halt with the depreciation of the ringgit, which occurred within two weeks after the floatation of the baht on July 2 1997. The fall of the Thai baht raised concerns about the resilience of the exchange rate arrangements in the region.

Buoyed by the success and profits associated with the floatation of the baht, currency speculators next focussed their attention to the other regional currencies with renewed vigour. The peso was floated on July 11, while Indonesia allowed the rupiah to fall sharply within the official intervention band on July 21.

Initially, Malaysia tried to defend the ringgit when it came under attack, but this strategy was not sustainable and proved costly. On July 14, the ringgit was allowed to depreciate. From RM2.50 to US$1, the ringgit slipped to RM2.61 (July 14) and gradually to RM2.72 (August 11) and RM2.83 (August 12), before reaching RM3.00 on September 2. The ringgit sank to an intraday low of RM4.88 on January 7, 1998, before recovering along with the regional stock market rally after the Chinese New Year/Hari Raya Puasa holidays. Following poor local corporate performance and negative developments in Japan, the ringgit weakened and reached RM4.16 on 8 July 1998.

  • Links Between KLSE and the Ringgit

The turbulence at the Kuala Lumpur Stock Exchange (KLSE) was closely tied to the ringgit depreciation. Although the KLSE started declining in the early part of 1997, the fall grew in earnest after Thailand announced the floatation of the baht (See Figure 2 and 3).

In order to prevent currency speculation, in early August 1997 Bank Negara imposed a US$2 million limit on outstanding non-commercial-related ringgit offer-side swap transaction with any single foreign customer. This was later followed by KLSE declaring the 100 component stocks of the KLCI as ėdesignated securitiesķ. The short-selling in the stock market was suspended through the prohibition of securities borrowing and lending. Local funds were encouraged to start buying up shares at the time when foreign funds were retreating.

The series of measures adopted in August failed to stop market panic. From the high of 1271 level in 25 February 1997, the KLSE composite index plunged to 477 points on 12 January 1998, with a loss of about 800 points or 63 per cent. At the high in 1997, the market capitalisation (comprising the main board and the second board) was RM917 billion but sank to RM308.69 billion by 12 January 1998. The KLSE composite index recovered briefly with the Chinese New Year/Hari Raya rally and rose to 745.12 on 2 March 1998. Since 2 April 1998, the KLSE CI started falling again with reports of poor corporate performance as well as the depreciation of the yen in mid-May. The KLSE composite index was 467.55 on 7 July 1998.




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