THE MALAYSIAN FINANCIAL CRISIS: ECONOMIC IMPACT AND RECOVERY
PROSPECTS BY MOHAMED ARIFF AND SYARISA YANTI ABUBAKAR
According to this article, the following are some of the consequences of the Malaysian crisis:
1. Impact on Trade
The improvement in external demand is largely boosted by the weak ringgit. In In the
early days of the crisis, trade was dampened as export demand by economies across
the region fell. dollar terms has shown some signs of recovery, and in fact, since the
last quarter of 1998, has be- come positive. dollar terms, increased for the first time,
after many months of continuous fall, in December 1998.8 In particular, imports of
intermediate goods have increased. Although these are implications for the trade
balance, this development is favorable light as it indicates rising external and domestic
demand. dollar. Imports, in U.S. Recently though, export growth in U.S.
2. Impact on Business Confidence Levels
To a certain extent, the findings reflected a cautiously optimistic sentiment among the
survey respondents. In the case of the fixed exchange rate, the survey showed that it
had certainly been effective in reducing the instability caused by the fluctuation of the
exchange rate. Nevertheless, the majority (85 per cent) indicated that they planned to
maintain their level of investment in the next one-three years, although a number of
respondents
expected
some
slowdown
in
foreign
investments
(MIER
1999b). However, slightly more than half of the companies surveyed expected an
increase in their transaction costs and bureaucratic red tape.
3. Impact on Industrial and Manufacturing Sector
In addition, the index of industrial production (IIP) has recently showed some positive
growth. In all probability, industrial production in general and manufacturing in
particular will record a significant increase in the second and subsequent quarters. The
performance of the manufacturing sector has been particularly encouraging with higher
sales recorded due to improved domestic demand. Given strong evidence of increased
demand, the shrinking IIP suggested that manufacturers were instead opting to run
down their inventories instead of producing more. Based on the first quarter 1999
results of the business conditions index (BCI) which registered a 3.5 point increase to
reach 48.5 points, there seems to be a significant turnaround in domestic demand and
business confidence.
4. Impact on Monetary Policy
Following the adoption of an easier monetary policy, as mentioned earlier, the statutory
reserve ratio (SRR) requirement was reduced to 4 per cent in September 1998. To a
certain extent, this is due to an overly cautious stance by banks and a depressed
demand for credit. The base lending rate (BLR) for commercial banks declined from
11.96 per cent in March 1998 to 8.05 per cent in March 1999. Interest rates also
declined precipitously with the interbank (three-month) rates falling from approximately
11 per cent in September 1998 to 6.4 per cent in February 1999. In the long run, this
may have adverse implications for the asset quality of banks.