BWFF 3043 INTERNATIONAL FINANCE
FIRST SEMESTER SESSION 2016/2017 (A161)
GROUP ASSIGNMENT 1
Submitted to:
DR. HASNIZA BT. MOHD. TAIB
Prepared by:
GROUP B
NO. NAME MATRIC NO.
1 SYRRYLL SYAFFIDA BINTI SAFFIEE 230134
2 NUR SYAZWANI BINTI BURHAN 230272
3 SHINDUJJA A/P MANIMARAN 233886
4 YAP YEE TENG 234230
Submission Date:
23rd October 2016
The Asian Financial Crisis 1997 began by the “Tom Yum Goong crisis” in Thailand. The economy of East Asia countries were heavily affected by the Asian Financial Crisis. The Global Financial Crisis started around late 2007 in the United States due to the housing and banking crisis that arose from sub-prime mortgage boom. Both crises had affected the Malaysia’s economy and multinational corporations (MNCs) in Malaysia.
The Asian Financial Crisis 1997 had affected the Malaysia’s economy. In the early of 1998, the Malaysian Ringgit had depreciated to a historic low of MYR4.88 against the U.S. dollar. The Kuala Lumpur Composite Index (KLCI) dropped sharply in September 1997. The shares value amounted to US$225 billion were erased from KLCI during the periods of mid-1997 to the early of 1998. This caused the market capitalization in KLSE dropped significantly. The domestic demand had contracted, which resulted from weak Malaysian Ringgit, low stock prices and the collapse of property market. The financial crisis brought negative effects to domestic-oriented sectors like construction as well as service sectors. Owing to tight liquidity, there was a sharp improvement in the non-performing loans (NPLs), especially for borrowing and financing.
During the periods of January 1998 to December 1998, Malaysia experienced a slump in foreign direct investment (FDI) because the investors had reduced their investments to prevent massive loss. The government had made the decision to reduce the budget for operating expenses. For example, the government reduced the operating expenses by abandoning or delaying the mega projects and thus led to a fall in public sector expenditure and investment. Additionally, weak Malaysian Ringgit had edged down the domestic consumption and reduced the imports of luxury goods (Zaherawati Zakaria, Zaliha Hj Hussin, Nazni Noordin, & Mohd Zool Hilmie Mohamed Sawal, 2010, pp.83-84).
The Asian Financial Crisis 1997 had brought huge impacts to multinational corporations (MNCs) in Malaysia. During the financial crisis, the weak Ringgit stimulated the growth in external demand and increased the exports of MNCs, especially in the manufacturing sector. For instance, the export-oriented MNCs can produce the manufactured goods at a lower cost, export the goods to foreign markets and enjoy large profits. Besides, the Malaysian government had implemented tax incentive policy for exporters. The tax incentive policy helped export-oriented MNCs to lower their transaction cost and encouraged MNCs to expand their export in manufacturing, agriculture and services sectors.
Furthermore, the Malaysian government had implemented the fixed exchange rate system. Malaysia maintained an exchange rate pegged at MYR3.80 to the U.S. dollar (Mohamed Ariff & Syarisa Yanti AbuBakar, 1999, pp.422-423). The pegged exchange rate system acted as a mainstay for monetary policy, which helped to curb inflation in Malaysia and protect the value of ringgit. The stability of currency had reduced the exposure of MNCs to the exchange rate fluctuations, which in turn boosted the business confidence level and maximised the profits of MNCs.
The Global Financial Crisis 2008 had affected the Malaysia’s economy, but it was not like the Asian Financial Crisis 1997. The Global Financial Crisis had greatly affected manufactured exports in Malaysia. The exports had declined obviously in 2008, which in turn caused a significant decline in the real GDP growth rate of Malaysia. The Industrial Production Index (IPI) had fallen dramatically from January 2008 to January 2009. The decline in manufactured exports caused the unemployment rate increased to 4.0% during the first quarter of 2009.
Besides, gross domestic investments dropped terribly in 2008. The decline in investments came mostly from the private sector. In the year 2007 and 2008, the foreign direct investment inflow of Malaysia was lower than the overseas direct investments by Malaysia. The foreign direct investment declined slightly in 2018 as compared with last year. According to Bank Negara Malaysia, as domestic savings were greater than investment, the current account balance of Malaysia achieved a surplus of 18% of Gross National Product (GNP). This indicated that the domestic economy remained weak, Malaysia had a limited capacity to stimulate its economy and create adequate investment opportunities to assimilate domestic savings. (Goh & Lim, 2010, pp.9-10)
During the Global Financial Crisis 2008, MNCs in Malaysia experienced an adverse effect. The multinational corporations in Malaysia were greatly affected by the massive capital outflows. The study revealed by Ooi (2008) indicated that “capital flows have had a notable impact on the Ringgit as its de-pegging from the U.S. dollar in 2005”. At the beginning of 2009, capital outflows diminished the value of Ringgit from MYR3.464 to MYR3.693 as compared to December 2008. The value of Ringgit had declined nearly 6.6% against the U.S. dollar. MNCs dominated in export and import activities were highly exposed to exchange rate fluctuation. The fluctuation of exchange rate affected the value of assets, capital structure, profitability and cash flow of MNCs. Moreover, the decline of global consumer demand arising from the global financial crisis reduced the exports of MNCs. This caused MNCs experienced business losses.
Next, the Global Financial Crisis had a negative impact on the banking system of Malaysia and influenced MNCs in Malaysia indirectly. The domestic bank had insignificant exposure to US sub-prime loan products. At year-end 2008, the non-performing loans contributed only 2.6% of net total loans. This showed a decrease of 0.6% compared to net total loans of 3.2% in year 2007 (Bank Negara Malaysia, 2009). In fact, the whole loan application in Malaysia revealed a downward trend in 2008 due to the slowdown of the economic activities. (Goh & Lim, 2010, p.19). The decrease in whole loan application was due to the strict regulation that made the MNCs unable to meet during the current scenario. Besides, given the weak business environment and an increase in unemployment, MNCs were facing more challenges to continue its operations.
In conclusion, the Malaysia’s economy and its MNCs were greatly influenced by the Asian Financial Crisis 1997 as well as the Global Financial Crisis 2008. The Malaysian government had made efforts to overcome these crises. The government had utilized its internal and external funds to resuscitate the economy.
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References
Goh, S. K., & Lim M. M. H. (2010). The impact of the global financial crisis: the case of Malaysia. TWN Global Economy Series, 26, pp. 9-26.
Mohamed Ariff, & Syarisa Yanti AbuBakar. (1999, December). The Malaysian financial crisis: economic impact and recovery prospects. The Developing Economic, XXXVII-4, pp. 422-423.
Ooi, S.K. (2008). Capital flows and financial assets in emerging markets: determinants, consequences and challenging for central banks: the Malaysian experience. BIS Papers, 44, pp. 322-323.
Zaherawati Zakaria, Zaliha Hj Hussin, Nazni Noordin,& Mohd Zool Hilmie Mohamed Sawal. (2010). Financial crisis of 1997/1998 in Malaysia: causes, impacts and recovery plans. Voice of Academia, 5(1), pp. 83-84.