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The Crisis and Policy Response

National Economic Recovery Plan
Chapter 1

Contents





Policy Response

A series of policy measures were adopted to deal with the financial crisis and stabilise the economy. The 1998 Budget and the 5 December package of policies contained measures to reduce current account deficit, strengthen balance of payments and fiscal account, improve competitiveness, and increase monetary and financial stability.

The 1998 Budget announced in 17 October 1997 encompassed the following measures:

  1. Reduction of Federal Government expenditure by 2 per cent, deferment of mega projects, and review of public agenciesí purchases of foreign goods.

  2. On the financial aspect, the prudential standards were strengthened with the classification of non-performing loans in arrears from six to three months, greater financial disclosure by banking institutions, and increasing general provision to 1.5 per cent.

  3. The Credit Plan was introduced to limit overall credit growth to 25 per cent by the end-1997 and 15 per cent by end-1998. In providing loans, banking institutions were to give priority to productive and export-oriented activities.

On 5 December 1997, the Government announced an additional package of policies when the regional instability proved to be more protracted than earlier anticipated. These policy measures were aimed at strengthening economic stability and instilling confidence in the financial system. There were concerns about the large current account deficit and high private sector debt amounting to 169 per cent of GDP in 1997. Hence, there was the need to prudently manage public sector finances while curbing excesses in the private sector. The policies are as follows:

  1. Reduce the current account deficit to 3 per cent of GNP in 1998.

  2. Trim Federal Government expenditure by 18 per cent in 1998.

  3. Stricter criteria for approvals of new reverse investment, and defer the implementation of non-strategic and non-essential projects.

  4. More emphasis placed on good corporate governance.

  5. Enhanced disclosure of information of corporations and closer scrutiny for corporate restructuring.

In February 1998, the following measures were announced:

  1. Bank Negara Malaysiaís three-month intervention rate was raised from 10 per cent to 11 per cent.

  2. The statutory reserve requirement (SRR) reduced by 3.5 per cent of eligible liabilities to 10 per cent.

The National Economic Action Council (NEAC) was established on 7 January 1998 as a consultative body to the Cabinet to deal with the economic problems. The purpose of the NEAC is to make recommendations to the Government on how to restore the economy and prevent it from going into a recession.

In 24-25 March 1998, the Government adopted pre-emptive measures to counter emerging financial problems by making it necessary for banks to shore up their capital-adequacy positions at the first sign of trouble. The structural reform in the financial sector includes more transparency and disclosure for banks and companies. Although government expenditure was reduced by 18 per cent, Malaysia would accept a RM$1 billion loan from the World Bank for social and poverty-related projects. The main measures adopted are as follows:

  1. Bring loan classification standards (including 3 months for non-performing loans) to best practice.

  2. Require 20 per cent provisioning against the uncollateralised portion of substandard loans.

  3. Increase minimum risk-weighted capital ratio (RWCR) of finance companies from 8 per cent to 10 per cent with interim compliance of 9 per cent.

  4. Increase minimum capital funds of finance companies from RM5 million to RM300 million and subsequently to RM600 million.

  5. Expand capital adequacy framework to incorporate market risk.

  6. Reduce single customer limit from 30 per cent to 25 per cent of capital funds.

  7. More intensive and rigorous supervision including conducting monthly stress tests on individual banking institutions.

  8. Aggregate statistics on non-performing loans (NPL), provisions and capital position of commercial banks, finance companies and merchant banks. Financial institutions are to report and publish key indicators of financial soundness, such as NPL, capital adequacy etc., both at bank level and on consolidated basis.



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