Essay: An Overview of Asian Financial Crisis

Before the Asian Financial Crisis, Indonesia, South Korea, Malaysia, and Thailand had an extraordinary records and impressive economic performances in 1994-1997 which is three years before Asian financial crisis. Asian markets went through: fast economic growth, low inflations, strong financial positions stability, increases saving rates, open economies, blooming export divisions and so on. Because of these flourishing financial markets throughout the early 1990’s, non-of-any country in Asia predicted the financial crisis which made them the sufferers of their own fiscal victory (Aghevli, 1999).
First failure in Asian financial markets was recorded from Thailand (Asian Financial Crisis Definition | Investopedia. 2015.) In early 1997 the IMF (International Monetary Fund) notified Thailand authorities about the upcoming financial crisis.  However, they failed to convince Thailand about the gravity of the emerging compilations. IMF was not aware about the huge weight of foreign debt of Thailand at that time. As a result, IMF assumed that the Thailand are able to tolerate with the crisis but in the end, this drove them to bankrupt and begin up the Asian financial crisis (Aghevli, 1999). Thailand financial crisis was also named as Tom Yum Goong crisis which was occurred due to the shortage of foreign currency to upkeep its stable exchange rate (Euromoney, 1997). Similarly, South Korea also have used up their foreign funds and became affected by the Asian financial crisis (Wikipedia, 2018).
Even though all the Asian countries underwent a loss of demand and self-confidence, the degree of impact from Asian Financial Crisis to different countries are different. Countries that are highly affected by the crisis include Indonesia, South Korea, and Thailand. Moderate impact by the crash was to Hong Kong, Malaysia and Philippines. The least impacted countries by the Crisis was Japan, China, Singapore and Vietnam (Asian Development Bank, 2017) The crisis spread throughout the Asian markets and as a result, this leads to the collapsing of currencies, stock market crashes, devalued assets, reduced import revenues and an increment in private debt. These Asian market failures, collapses and currency devaluations was also felt to United States, Russia and Europe. (Asian Financial Crisis Definition | Investopedia. 2015.)
In order to deal with the crisis, Asian countries had adopt protective strategies to safeguard the stability of their own currency. Hence at the mid of 1997, the authorities of affected financial markets requested help from IMF when all their usable foreign funds were exhausted. As a response, International Monetary Fund carried out their task by providing financial assistance and temporary financing to the affected countries. In fact, IMF provided the biggest loans in its history at Asian financial crisis in 1997. IMF and the World Bank then secured the financial stability of those countries by their financial involvement which gave rise to substantial obtain of US funds (Aghevli, 1999).
Causes of Asian Financial Crisis
Between June 1997 and January 1998, a financial crisis engulfed some of the fast-growing country economies of Asia—Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea—and sent their economies crashing like a shower of meteors. It all started with the plummeted of Thailand currency, then the stock markets and per capita incomes of those countries involved. Before the crisis ended There are 1.1 million Thais fell below the poverty line before the crisis ended and the perplexed and humiliated leader of South Korea left office before his term was up. In Indonesia, the rupiah plunged by 86 per cent against the US dollar and 19 million people fell below the poverty line. President Suharto was forced to step down in May 1998, and Jakarta exploded in violence, leaving about 1,200 people dead and 5,000 buildings burnt. There are mainly three causes for Asian financial crisis which can be clearly identified (Hays, 2008):
1. Crony relationships between banks, politicians and business.
Investors who are in seek of new openings and opportunities shifted an extensive amount of foreign fund into Asia due to the low interest rates provided for them. This brought immense amounts of capital into Asia for the Economic Boom. However, due to the poor corporate control and weak investment systems, the national distribution of those lent foreign capital was left unproductive.  The limited absorptive capabilities of these Asian countries made those foreign funds wasteful.
2. Over optimistic, greedy, wasteful, arrogant policies.
Borrowers were reassured and encouraged to acquire dollar-denominated debt. This is due to the fixed exchange rates which pictured them an incorrect sense of safe keeping.
3. Stiff competition from China on the cheap labor front especially after the Chinese currency was devalued in 1994
It is due to some reasons the exports of affected Asian crisis were very weaken in the mid of 1990’s. Some of those reasons included: the indebtedness of US dollar in compared to Yen, the weakening value of china’s Yuan in 1994, and NAFTA following market collapses. Due to the extensive capital entries through foreign funds and wilting exports, it gave rise to an enlarging account deficiency. The troubles were made worse by opening up the countries to external shocks due to the short-term acquired funds (Aghevli, 1999).
Causes of Asian Financial Crisis ( Malaysia vs Thailand )
Malaysia
During Asian Financial Crisis in 1997-98, the stock market in Malaysia crashed 75 percent and the currency plummeted 40 percent to a 24 years low. One billion dollars in foreign reserves were blown trying to prop up the currency. Ethnic Chinese tycoons were hit hard by the Asian financial crisis and many remained technically bankrupt for years afterwards.
One of the causes of the crisis in Malaysia was that it had a high current account deficits whereas imports exceed exports, which made it a target for currency speculators. The deficit was partly caused by money poured into infrastructure projects. Growth was spurred by government spending and tax breaks than efficiency. John H. Drabble of the University of Sydney wrote: “The Asian financial crisis originated in heavy international currency speculation leading to major slumps in exchange rates beginning with the Thai baht in May 1997, spreading rapidly throughout East and Southeast Asia and severely affecting the banking and finance sectors” (Hays, 2008). The Malaysian ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar by January 1998. There was a heavy outflow of foreign capital.
The International Monetary Fund (IMF) recommended austerity changes to fiscal and monetary policies in order to counter the crisis. However, some countries like Thailand, South Korea, and Indonesia reluctantly adopted these. The Malaysian government refused and implemented independent measures; the ringgit became non-convertible externally and was pegged at RM 3.80 to the US dollar, while foreign capital repatriated before staying at least twelve months was subject to substantial levies (Hays, 2008). Despite international criticism these actions stabilized the domestic situation quite effectively, restoring net growth especially compared to neighbouring Indonesia.
In general, as compared to Thailand, Malaysia was not in as bad of shape as Thailand before the crisis and after. In Malaysia, the corruption was not that bad, banks and companies were not as indebted as their Thai and Indonesian counterparts, and investment money wasn’t wasted on frivolous real estate developments like it was in Thailand, instead it was poured into expensive public works projects (Hays, 2008). Also, Malaysia didn’t seek IMF help like Thailand, South Korea and Indonesia and didn’t have the massive foreign debt that these countries has either. Instead, Malaysia tried to revive the economy through domestic policies such as lowing interest rates and government spending, reducing corporate and bank debts, and enacting legislation that reduced the power that foreign investors could have the Malaysian economy.
Thailand
As for Thailand, there was a massive borrowing in dollars before the crisis. Asian banks owed more in dollars than they held in reserves. Most of the debt was short term and financed a spending binge. Money was foolishly invested speculative real estate. In addition, Thailand was filled with excess phone lines, petrochemical plants and cement factories. For instant, they spent more than $1 billion on the Muang Thing residential and commercial development project.
Through speculation, a weak real estate sector was created. Businesses were unable to pay the high interest rates. The weakened banking sector further undermined the system as it could no longer provide sufficient loans. By 1996, unsold properties around Bangkok began to accumulate and investors who worried about defaults began taking their money out of Thailand. As of August 1997, there were 350,000 vacant housing units in Bangkok and many unfinished offices and empty hotels (Hays, 2008). Many businesses were “sunset industries” in which companies churned out the same products year after year with less profit instead of reinvesting in more modern equipment. Thailand tried to enter the memory chip business against powerful competitors like South Korea and Taiwan. It was hit hard when the price of these chips crashed.
Furthermore, individuals also amassed debt. People earning $350 a month were charging many time that amount with easy-to-get credit cards and amassing huge debts buying expensive clothes and pure-bred puppies (Hays, 2018). Interest rates had been higher in Thailand than in the U.S. Because the baht was tied to the dollar. Many Thais makes profit by borrowing as many dollars as they could, exchanged them from baht and profited the difference. This worked fine until the baht collapse.
In fact, The Thai government does not help much. There were three different administrations between 1993 and 1996 but none of them wanted to be the one to rain on Thailand’s parade and take measures to reign in Thailand’s bubble. The Prime Minster in the mid 1990s, Banharn Silpa-archa, was known as the “walking ATM” as the government treasury of $39 billion to prop up the economy is emptied by him and still keeping companies and banks in business even though they had accumulated massive debts (Hays, 2008).
On July 2 1997, Thailand shifted from a dollar-pegged fixed currency policy to a floating exchange system which resulted in the devaluation of the baht. The Thai economy melted down after a move that sent the currency spiraling downward by 30 percent as currency speculators attacked which known as the shock floating of the baht. As a result, the baht went from 25 to the dollar to 50 to the dollar before stabilizing at around 40 to the dollar and the Thai government spent $10 billion of its $38 billion foreign reserves futilely trying to save the Thai currency with the belief the currency would rebound and the loses would be recouped (Hays, 2018). Unfortunately, the currency didn’t recoup and the Thai government needed foreign currency to make $50 billion import and loan payments, which ate into reserves further. By the end of 1997, the Thai stock market had declined by 41 percent, the currency had depreciated by 56 percent. Thanong Bidaya was the finance minister of Thailand who decided to devalue the baht which then triggered the 1997-1998 Asian financial crisis.
Effect & Consequences of Asian Financial Crisis ( Malaysia vs Thailand )
Malaysia
In mid-May 1997 marking the end of Asia Miracle and the beginning of Asian Financial Crisis, the Thai baht came under severe pressure from speculative attacks. The ringgit (RM) also felt the impact due to the depreciation of Thailand Baht in world market. As the ringgit was also not spared, it came under severe selling pressure. The Prime Minister of Malaysia, Tun Dr Mahathir ordered the central bank of Malaysia, Bank Negara Malaysia, to intervene in the foreign exchange market (FOREX) in order to uphold the value of the ringgit. Bank Negara valiantly upheld the value of the ringgit for about a week before it finally was forced to float the ringgit on July 14. Unfortunately, the bank had already lost approximately to U.S.$1.5 billion in the effort to prop up the ringgit. At its minimum point, the ringgit depreciated against the dollar by almost 50 per cent, hitting a high of RM 4.88 to the U.S. dollar on January 7, 1998 (Elangkovan & Said, 2013).
After a short period of stability between the months of February and March, the exchange rate continued to deteriorate with wide fluctuations in the upcoming months (Lopez, 1999). Even more drastic than the plunge in the exchange rate, was the collapse of the stock market of Kuala Lumpur Stock Exchange (KLCE). Between July and December 1997, the composite index of the Kuala Lumpur Stock Exchange (KLSE CI) fell by 44.9 per cent. After a slight recovery in the first quarter of 1999, the index again fell to an eleven-year low of 262.70 points on September 1, 1998 (Elangkovan &Said, 2013). On the whole, between May 1, 1997 and September 1, 1998, market capitalization in the KLSE fell by about 78.7 per cent to RM 181.5 billion. In fact, Malaysia experienced the biggest stock market plunge in the South East Asia Region although it enjoyed the best pre-crisis economic fundamentals among countries that were hit by the crisis (Athukorala, 1998).
The dynamics of the property in Malaysia also subsequently burst, and the tragedy was accompanied by massive capital outflows as confidence in the Malaysian economy by the investors became increasingly shaky. As a result of the actions taken by the investors, the banking system began to experience increasing nonperforming loans (NPLs) which, according to Bank Negara data, rose from about a modest 2.18 per cent in June 1997 to 4.08 per cent in December 1997, and then to a high of 11.45 per cent in July 1998 (Malaysia, EPU 1999). Nonperforming loans here are defined as a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a performing loan, even if the debtor has not caught up on all the missed payments (Brennan and Aranda, 1999)
Private sector estimates for NPL ratios at the time were much higher than the earlier official figures suggested, as many companies had begun to roll over debt as part of their survival strategy (Elangkovan & Said, 2013). On other hand, the increase in NPLs in the banking and financial sector slapped in a sharp downturn in borrowing and financing, bringing about tight liquidity conditions. After a short times lag, the real sector of the economy also began to feel the pain of the crisis. The weak stock prices, property market slump, and the net contractionary impact of the ringgit depreciation together led to a negative wealth effect which then caused a general contraction in domestic demand. The domestic-oriented industries, such as the construction and services sectors, were severely hit by the financial crisis.
Meanwhile, private investment generally contracted due to uncertainties and dim economics progress arising from unstable exchange rates, the decline in local and external demand, as well as excess capacity and tight liquidity position in the economy causes the contraction of the private investment in the country (Jomo, 2001). Foreign direct investment (FDI) levels, as measured by the value of applications received in the manufacturing sector and applications for investment incentives from the hotel, tourism, and agriculture sectors by the Malaysian Industrial Authority (MIDA), shows a negative trend over the period January–December 1998 due to shaky economics conditions (Sachs and Velasco, 1996). In the public sector, a decrease in both expenditure and investment was expected earlier following the government’s announcement that it was slashing the budget for operating expenses by 18 per cent, not to mention the cancellation or postponement of several infrastructure mega-projects (Elangkovan & Said, 2013). The government action is believed to reduce the government spending thus producing a fiscal surplus in the economy.
With the major decrease in consumption, investment, and government expenditure, the only source of growth was expected to rise from the country’s net exports. In addition, the initial impact of the crisis led to declining imports of luxury goods as domestic demand slowed due to the depreciation of the ringgit in the world market. Meanwhile, imports in general though did record an increase 52.7 per cent year-on-year in February 1998 (Elangkovan & Said, 2013). The high import of Malaysian manufactured exports, especially of capital and intermediate goods, goes a long way in explaining the subsequent rise in imports at the time (Obstfeld, 1996). Meanwhile, exports rose as well, especially in the resource-based sector, and displayed a continued uptrend in ringgit terms. Unfortunately, when converted into U.S. dollar terms, most of the major export categories displayed a downward trend.
The crisis-induced slowdown in economic growth has had an undeniable impact on Malaysia’s social dynamic as well. The contraction in domestic product resulted in the expansion of unemployment growth and retrenchment levels. While employment growth had been growing steadily at 4.9 and 4.6 per cent in 1996 and 1997, respectively, it contracted by 3 per cent in 1998 (Elangkovan & Said, 2013). For the whole of 1998, the number of workers retrenched was 83,865, a sharp increase from the 19,000 retrenched in 1997 as shown in the Central Bank of Malaysia. Inflation levels increases as well, reaching a high of 6.2 percent in June 1998 before moderating (Chang and Velasco, 1998). The inflation rate was 5.3 per cent in 1998. The rise in unemployment and inflation are the main channels through which the social impact of the crisis has been transmitted because it is through these channels that real household income declined. Urban families experienced the worst of the impact due to increased cost of living, including the cost of food, household necessities, health care, tertiary education, and transportation.
Thailand
The world’s highest economic growth rate in between 1985 – 1996 was at an average about 9% recorded in Thailand. At the time their inflation was kept low in between 3.4%–5.7%. Thai baht (THB) is the currency of Thailand. On 15th May 1997 the currency of Thai baht was hit by the gigantic financial crisis. In 1996 Thai baht was fixed to 25฿ to 1 US dollar. As a result of this financial crisis in 1998 the baht devalued to 56฿ to 1 US dollar (Hunter, Kaufman & Krueger, 2012). As a result of the Asian financial crisis the flourishing economy of Thailand was paused. This created:
 Huge downsizings in financial assets, constructions and stocks
 Population was left unemployed
 600,000 foreign employees left Thailand
 75% drop was recorded in Thai Stock market
 Thai finance companies collapsed (Arora, Kant & Khola, 2015)
On 14th May and 15th May 1997, the Thai Baht was hit by massive speculative attacks. On 30th June 1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the basket of currencies in which the U.S. dollar was the main component, against international speculators. Thailand’s booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers being sent back to their home countries (Hunter, Kaufman & Krueger, 2012). The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the U.S. dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed (Arora, Kant & Khola, 2015). Without foreign reserves to support the US Baht currency peg, the Thai government was eventually forced to float the Baht, on 2nd July 1997, allowing the value of the Baht to be set by the currency market. On 11th August 1997, the IMF unveiled a rescue package for Thailand with more than $17 billion, subject to conditions such as passing laws relating to bankruptcy reorganizing and restructuring procedures and establishing strong regulation frameworks for banks and other financial institutions (Hunter, Kaufman & Krueger, 2012). The IMF approved on 20th August 1997, another bailout package of $3.9 billion.
The Asian Financial Crisis in 1997-98 produced the worst economic slump in Thailand since World War II. The financial sector was left holding $31 billion in bad debts, unemployment increased by 23 percent to 1.3 million people, stocks fell to their lowest levels in recent memory, banks collapsed, construction stopped, offices buildings were empty, hotels lacked guests (Hays, 2008). There were suicides. Metal health hotlines were opened.
One financial analyst told Time that among foreign investors Thailand went from being the “flavor-of-the-month” to the “stink-of-the-month.” In 1998, the economy shrunk by 10.5 percent, 46 percent of all loans were non-performing, and unemployment rose to 8.5 percent which is 2 million workers (Hays, 2008). The economy shrunk by 2 percent in 1999 and unemployment rose to 9.5 percent which is 3 million workers. Large auctions were held for repossessed cars and houses picked up after foreclosures. Many of Thailand’s biggest corporations went bankrupt. The biggest corporate debt defaulter, Thai Petrocical Industry (TPI), had massed $3.75 billion in debts (Hays, 2008). The Australian accountant who handled creditors claims on the company traveled around in a bullet-proof Mercedes accompanied by gun-toting bodyguards. One nosy Australian auditor who delved too deeply into the accounts of a trouble bank was gunned on a busy highway in Bangkok. The net worth of the rich Lamsams and Sophoinpaniches families shrunk by 60 percent (Hays, 2013).
Thai’s financial markets was recovered by 2001. The increments in tax revenues permitted in Thailand helped the authorities to stabilize its budget and pay off their debt to IMF by 2003. By October 2010 Thai baht increased in value to 29฿ to 1 US dollar (Wikipedia, 2018)
Implementation after Asian Financial Crisis ( Malaysia vs Thailand )
Malaysia
One of the main reasons of Malaysian economy stability today is from a leader who fights back the financial crisis with much patience and reliance known as Tun Dr Mahathir. In September 1997, Mahathir declared that “trading of national currency is unnecessary, unproductive and immoral,” and argued that it should be “stopped” and “made illegal.” Mahathir threatened to impose an unilateral ban on foreign exchange purchases unrelated to imports but it never happened in Malaysia. All these actions took by Tun Mahathir seemed to exacerbate the situation until he was finally reined in by regional government leaders and his cabinet colleagues. His reputation by the Western leaders worsened day by day due to his action to ban the foreign exchange purchases, until Tun Mahathir came to be demonized as the regional bad boy (Edward, 1997).
On 1 September 1998, the Malaysian authorities lead by Tun Dr.Mahathir introduced strong control over the capital and other currency controls. The move taken by Mahathir is to fix the ringgit exchange rate at RM3.8 to the US dollar, compared to the pre-crisis rate of around RM2.50. At that time, due to political misunderstandings between Anwar and Mahathir, the prime minister then dismissed the deputy prime minister and finance minister, Anwar Ibrahim. The imposition of capital controls on outflows was clearly an important challenge to the prevailing orthodoxy, especially as promoted by the IMF. Capital controls did not slow down the Malaysia’s recovery due to the financial crisis. The 1998 collapse was less renounced in Malaysia than in Thailand and Indonesia, while the recovery in Malaysia was faster in 1999 and 2000. Absolutely, the pre-crisis problems in Malaysia were less serious, due to strengthened prudential regulations after the banking crisis of the late 1980s.
A strict control was imposed on Malaysian private borrowing from abroad generally whereby it required borrowers to demonstrate likely foreign exchange earnings from the proposed investments to be financed with foreign credit. Although Malaysia had the most open economy in the region after Hong Kong and Singapore, with the total value of its international trade around double its annual national income amazingly, its foreign
borrowing and the share of short-term loans in total borrowing were far less than in the more closed economies of South Korea, Indonesia, and Thailand (Edward, 1997). In the measure of decreasing the foreign borrowings, the Malaysian authorities had limited exposure to foreign bank borrowing, while their neighbours in East Asia allowed, facilitated, and even encouraged such capital inflows from the late 1980s such as Thailand who emerged as a center of attraction for investment. The vulnerability of East Asian economies to such borrowing was not due merely to financial interests seeking arbitrage and other related opportunities, or to corporate interests seeking cheaper and easier credit. Bank for International Settlements (BIS) regulations greatly encouraged short-term lending.
While the effects of capital flows to stock markets undeniably differ from those of foreign bank lending, the risk was such portfolio capital flows are even more easily reversible than short-term foreign loans. Malaysian bank vulnerability during the crisis was not so significant due not so much to foreign borrowing as to extensive lending for stock market investments and property purchases and to their reliance on shares and real assets for loan collateral. Considering the high savings rates in the South East Asia region, there is no evidence that portfolio capital inflows significantly contributed to productive investments or economic growth. Unfortunately, the reversal of such flows proved to be very disruptive, exacerbating volatility and causing a certain risk to the economy. Their impact has been due largely affected to the wealth effect and its consequences for consumption and, eventually, investment. When such capital flow reversals were large and sustained, they contributed to significant disruption. To make the situation more worse, while portfolio capital inflows built up slowly, outflows were much larger and more sudden. The supply of the national currency became much more higher than the demand for Malaysian Ringgit (RM). Such outflows from late 1993 had resulted in a massive collapse of the Malaysian stock market, Kuala Lumpur Stock Exchange (KLSE). The early 1994 introduction of controls on inflows sought to discourage yet another buildup of such potentially disruptive inflows (Chander and Patro, 2000).
The efficiency of the Malaysian controls on the capitals was due largely arguable to their appropriate and effective design when they were introduced by Tun Dr. Mahathir. At the time, many market analysts did not consider and acknowledge the Malaysian authorities capable of designing and implementing such controls, but some later conceded that they had been wrong for a lengthy period of time. The controls addressed the problem and were subsequently revised in February 1999 and lifted after a year. The Malaysian authorities reviewed their assessment of the capital controls and demonstrated their flexibility, responsiveness, and, thus, commitment to being market and investor friendly. The most important part was they emphasized from the outset that the measures were directed at currency speculation, and not at foreign direct investment (FDI) although FDI plays a major role in enhancing the progress of economic growth in a country. Although green field FDI to Malaysia declined after 1996, a global decline from 2000 also affected the Southeast Asian region as a whole including Singapore, with China and a few others being the only exceptions (Elangkovan & Said, 2013). The argument that rises at that time was the Malaysian capital controls provided a “screen behind which favored firms could be supported, and if it’s true, the analysis would have to shift to the other measures introduced to provide such support, since the controls only provided a protective screen. Amazingly, the argument’s evidence points to significantly greater appreciation of the prices of shares associated with the surviving political leadership in the month right after the introduction of controls on capitals by the government of Malaysia.
The government emphasized efforts to bolster the stock market, for which many blame the government controlled Employees Provident Fund (EPF) of over RM10 billion in 1998 (Elangkovan & Said, 2013). The EPF and other Malaysian government– controlled institutions are believed to have bought about RM2 billions of Malaysian stock through Singapore- and Hong Kong–based brokers to give the impression of renewed foreign investor interest in the Malaysian market (Elangkovan & Said, 2013). Hence, the government phased out the September 1998 and subsequent capital and currency control measures in light of their ambiguous contribution to economic recovery, changing conditions, and the adverse consequences of retaining the measures. The National Economic Action Council’s later efforts to revise the 1 September 1998 measures—thus undermining their main original intent to deter panic-driven capital flight—reflected the pragmatism and flexibility of the Mahathir regime despite his rhetoric, and probably limited damage to foreign investor sentiment.
Generally, prior to the assumption of the role as the sole currency-issuing authority by Central bank in 1967, the exchange rate of the Malaysian dollar was fixed at 2s.4d sterling. On Junes 1967 when Central Bank commenced issuing currency, Malayan dollar was exchangeable for Malaysian dollar. However with the devaluation of sterling by 14.3 % in November, the sterling-pegged Malayan dollar was devalued by the same magnitude automatically (Elangkovan & Said, 2013). Instead of the previous 2s.4d, the exchange rate for one Malaysian dollar became equal to 2s.9d. Hence the Malayan dollar was then worth 85.71 cents of Malaysian dollar. In 1997-1998 East Asian Financial Crisis, the Central bank respond to pegging the ringgit to the United States dollar at RM 3.80. The rationale for such policy action was to provide a breathing space for Malaysian economy to recover from the spill over recessionary effects by securing monetary policy autonomy for the country.
As a part of the capital control imposed by Tun Dr. Mahathir, the following measures are taken to ensure that the objectives of stabilizing the Ringgit and control the capital flows are accomplished.
Thailand
The Asian crisis first emerged in Thailand in 1997 as the baht came under a series of increasingly serious speculative attacks and markets lost confidence in the economy. On August 20, 1997, the IMF’s Executive Board approved financial support for Thailand of up to SDR 2.9 billion, or about US$4 billion, over a 34-month period. The total package of bilateral and multilateral assistance to Thailand came to US$17.2 billion (International Monetary Fund, 2000). Thailand drew US$14.1 billion of that amount before announcing in September 1999 that it did not plan to draw on the remaining balances, in light of the improved economic situation. In the early stages of the program, the Thai authorities adapted monetary policy to a managed float of the baht; fostered the restructuring of distressed financial institutions, including the closure of 56 bankrupt finance companies; enacted budget cuts to free up resources to help finance the restructuring and to support improvement in the current-account position; deepened the role of the private sector in the Thai economy; and sought to attract foreign capital through other reform measures (International Monetary Fund, 2000).
The rapid spread of the Asian crisis in late 1997-bringing a larger-than-expected depreciation of the baht, a sharp economic downturn and adverse regional economic developments–warranted revisions to the Thai program. The revisions were undertaken through a series of program reviews conducted in close consultation with the Thai authorities. In the context of a recession, whose severity was unforeseen, they aimed to restore economic growth, ensure the continued restructuring of the Thai economy, and protect those elements of society most vulnerable to the economic downturn.
Monetary policy focused on both supporting exchange-rate stability and fostering an economic recovery. As the baht began to steady, the Thai authorities reduced interest rates. By mid-1998, money market interest rates began to approach pre-crisis levels, and first deposit, and then lending rates, started to drop as well. By September 1999, money market rates reached their lowest levels in over a decade.
Fiscal policy shifted in the face of the economic slowdown. While the first letter of intent called for a government budget surplus equal to 1 percent of GDP in 1997/98, beginning in February 1998 the program began targeting a fiscal deficit (International Monetary Fund, 2000). The targeted deficit (excluding interest costs of financial sector reform) grew from 2 percent to 6 percent by April 1999, although the actual deficit for 1998/99 is estimated to have been under 5 percent, inclusive of interest costs of financial sector reform, amounting to almost 2 percent of GDP, the deficit was about 6.5 percent (International Monetary Fund, 2000). Much of the increased spending focused on boosting social safety net programs to ensure the protection of Thais affected by crisis. While fiscal stimulus remains important for the time being, over the medium term, fiscal consolidation will be needed to reverse the rise in public debt.
Financial sector restructuring has remained a key policy area throughout the Thai program. In the early stages, the program concentrated on the liquidation of finance companies, government intervention in the weakest banks, and the recapitalization of the banking system. In 1998, the reform effort accelerated, with a focus on privatizing the intervened banks, disposing of assets from the finance companies and restructuring corporate debt. The authorities made great strides by strengthening the institutional framework, including through the reform of the bankruptcy act, foreclosure procedures and foreign investment restrictions. However, non-performing loans remain at a high level, underpinning the need to accelerate corporate debt and bank restructuring.
Thailand’s economy returned to positive growth in late 1998, and GDP growth reached over 4 percent in 1999 and should grow by 4.5-5.0 percent in 2000. The balance of payments is expected to remain strong in the near term, even as the current-account surplus declines as the recovery proceeds. Foreign-exchange reserves remain within the $32-34 billion range envisioned in the program. With output recovering and reserves restored to comfortable levels, the authorities treated the IMF loan as precautionary and made no further drawings after September 1999. The stand-by arrangement expired on June 19, 2000 (International Monetary Fund, 2000).