Last updated: June 27, 2019
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Malaysia after Asian Crisis

Malaysia entered the Asian financial crisis due to many reasons. One of the problems was the set of regulations and restrictions on capital flow, which the government instituted in 1989/1994. Malaysia short-term debt was lower than its foreign exchange reserves; which made the country vulnerable to run out of its reserves. Malaysia was also in very high level of debt, which created panic among the investors. The 1997 created a drastic situation for Malaysian economy. The major change was fall of the FDI (foreign direct investment) that depreciated the Ringgit value as capital flew away. In response to the crisis Malaysian government pegged Malaysian Ringgit at 3.80 to US dollar; while refusing economic aid from IMF. The reason for such refusal was the tough conditions that are normally part of the lending term. Such posture by the Malaysia government created less critical scenario compared to Indonesia, Thailand and Philippines. However the GDP suffered a sharp contraction of 7.5 percent in 1998, which rebounded back to 5.6 in 1999. Malaysian government predicted 5.8 percent GDP growth in 2000; which was a realistic prediction.

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In response Malaysia government announced a pre-emptive measure to counter the financial crisis in 1998.  For example the government made it essential for banks to shore up their capital adequacy position at the first sign of trouble. This structural reform in financial sector included greater transparency and disclosure of banks. Even though government did not apply for foreign loans, but it took RM$ 1 billion loan to reduce poverty related issues.

The government also increased minimum weighted capital ratio of finance companies from 8 to 10 percent with interim compliance of 9 percent. It also increased the minimum capital funds from RM5 million to RM300 million; and subsequently RM600 million. The government also addressed the capital adequacy framework to incorporate the market risk. It also reduced the single customer limit from 30 to 25 percent. There was also more rigorous monthly supervision of individual banking institutions. It was decided that the financial institutes were to report and publish key indicators of financial soundness consistently.


These steps helped in rejuvenating the economy. The government did massive spending to ensure the economic recovery mainly led by strong growth in exports; specifically the export of electronic products to US; Malaysia main trade and investment partner. The central Bank Negara followed low interest policy, which kept the inflationary pressure low. These steps ensured the swift economic recovery compared to its neighbours in many ways, but the pre-1997 financial affluence has yet to be achieved.  In 2000 there was also a revival in domestic investment that created not only employment, but also helped Malaysia in exporting its products along with lower inflation. Learning lesson from the past certain restriction were relaxed from FDI. The government promoted corporate and financial restructuring to address the structural weaknesses that were evident during the crisis.




One main issue in Malaysian economy is the tariff at imports, which was even increased in 1998 from 8.1 percent and 9.2 percent in 2001. Despite the hike, the process was made more transparent compared to pre-crisis situation where gaps in the process created many problems in the tariff system. The government tax measures were offered in various manufacturing activities including exports, agriculture and tourism. Some of these incentives were provided as quid pro quo for local content requirement, which were removed to make the process easy. The reason for non-tax incentives has been justified on the ground of prevention of market failure.


The government also opened economy for FDI and trade goods with few exceptions

(rice and automotives). Malaysia at present manufactures 2.5 percent of global electronic production. The electronic segment has been proving main engine of Malaysia growth helping it to recover from the crisis sooner than its neighbours. Government is highly protective of the automotive sector and has been sheltered from foreign competition due to high tariff. Such steps ensured to win large share of the domestic market for local automotive makers. The government also put capital controls in place that helped in stabilizing the market not only in Malaysia but in South East Asian market as well.  The measure brought the fruit for new government polices and rebound took place at the end of 2001 to the level of pre-crisis era. However the per captia income remained at US3531 level which was still 20 percent lower than pre-crisis.




Malaysia is slowly bringing in its domestic standards with international norms and procedure. During 1998/1999 the Malaysian government developed new standards to correspond to the international standards, which helped in winning trust of international

community. After 1997 the government also enacted two news laws and amended four others to strengthen the protection of intellectual property rights and bring domestic legislation into conformity with TRIPS agreement, which is helping in enforcement of IPR laws pertaining to copyrights especially. The fixed exchange rate was abolished in 2005 in favour of floating system, which made the Ringgit stronger against various currencies. It is due these steps that since December 2005, there has been no depreciation of Malaysian Ringgit.


The year 2005 was a year of high economic growth and low inflation that also helped in boosting the domestic market particularly the private sector. In the first nine months of the 2005, the manufacturing and service sectors have grown by 11.5 and 6.8 percent respectively. Malaysian economy is expected to remain strong despite the sliding US dollar and high oil price. The Government has made considerable progress in addressing structural weaknesses that became more evident during the Asian crisis, by promoting corporate and financial restructuring. A more liberal trade and investment regime could also contribute greatly not just to a sustained economic recovery, but also to Malaysia’s long-term economic development.  Thus we can say that the Malaysia solution what other countries did and put interest rate up in an attempt to uphold the local currency and saved Malaysian currency from total collapse. This step ensured the sustainability of the economy and inflation did not take place as expected by speculators.


Frank-Jürgen Richter, The Asian Economic Catharsis: How Asian Firms Bounce Back from Crisis. Quorum Books., 2000.


“Malaysia.” WTO. 25 Nov 2006 ;;.


Mark Beeson, “Mahathir and the Markets: Globalisation and the Pursuit of Economic Autonomy in Malaysia .” Pacific Affairs (2000):


Roger Kershaw, “Riding the Islamic Tiger in Malaysia .” Contemporary Review. (2003):