Malaysia: A Different Path
The year was 1997. The place – Malaysia. The economy was booming and had averaged an impressive 8.9% growth rate the past five years. 1997 looked to be no different. In fact, it looked to be an even better year for all Malaysians.
At the end of 1996, the Kuala Lumpur Composite Index had grown by almost a quarter and was still climbing at the start of 1997. The country was experiencing an unprecedented surge in foreign investments. Companies were expanding at a frenetic pace, rushing to raise capital on the stock market. According to the Bank Negara Malaysia (BNM), Malaysia’s central bank, investment in shares and corporate securities rose more than nine-fold from 1991 to 1996.
|Year||KLSE||Turnover||# of Listed Companies||New Shares (RM bn)||Market Capitalization (RM bn)|
The then Prime Minister, Dr. Mahathir Mohamad, was a happy man. His pet mega-projects, the multi-billion dollar Bakun dam power project, the Petronas Twin Towers and the Multimedia Super-corridor Highway, were all on track. His ideas for a Malaysia Inc. and Wawasan 2020 (Vision 2020) were also progressing smoothly. Things were going so well that Mahathir took two months off work leaving his deputy, the then Finance Minister, Anwar Ibrahim as acting P.M..
Dark Clouds Set In
Like the annual Indonesian forest fire haze that sweeps into Malaysia every summer, a wave of panic and disbelief descended upon the region in July. Malaysians were left in a shocked stupor as they watched neighboring Thailand’s economy become unglued.
"At that point looking at Thailand, Econs 101 teaches people to look at your current accounts but every Tom, Dick and Harry, was borrowing cheap loans," recalls Song Seng Wun, an Asian Economist with ABN AMRO at the time. "It’s not a sustainable situation. We saw it coming," Song, a Malaysian based in Singapore now with CIMB says.
Many in Malaysia hoped that Mahathir’s return would set things back on track. But the ripple effect was just too great. Harsh reality hit when people realized how inter-linked countries were. "It was nothing surprising but I was shocked with the knock-on impact on the rest of the region," adds Song.
"Friends, relatives, politicians, policymakers and analysts were thinking that it was just a currency crisis and that it was business as usual. To us, we called it the great Asia Crisis as it had vast global implications. I was really prepared for the worst," admits Tan Teng Boo, managing director of Capital Dynamics Asset Management.
Anarchy In The Market
The ringgit went from an all time high of RM2.493 against the U.S. dollar in April '97, to 2.636 in July. Just a few weeks later the currency spent the rest of the year hovering above the 3.00 ringgit level.
The currency crisis spared few. Companies that took advantage of cheap foreign currency loans to expand suddenly saw their debts increase. Imports-dependent businesses were hard hit, as were middle-class punters and pensioners alike who had channeled savings into the KLSE.
For months Malaysia resisted the obvious by downplaying its economic problems, leading analysts to brand it a country in denial. Tan of Capital Dynamics remembers conducting, "special seminars at the end of 1997 to warn of the Great Asia Crisis. If policy makers and central bankers did not get the crisis correct, it could even lead to global depression like the 1930s."
Instead Malaysia went off on a tangent and blamed foreign speculators for swiftly spreading the contagion and calling them "ferocious beasts."
During the launch of a new and computerized stock exchange in mid-August 1997, Dr. Mahathir declared the crisis the handiwork of "power predators" from abroad. A few days later, Mahathir banned what he called 'manipulative short-selling' of blue chip stocks. Stunned by the change in market rules and taken aback by Mahathir’s harsh rhetoric, investors left the market in droves.
Even with later announcements of austerity measures, fiscal restraint and budget cuts, the KLSI failed to reverse investors' confidence. The KLCI closed the year at 594.44, down a whopping 51%. “Investors were badly hurt as they have been used to good times and the Asian Crisis came out of the blue. All sectors fell at more or less the same time,” Tan explained.
January of 1998 saw the ringgit bottom out at RM4.595. Many small and medium-sized enterprises closed shop. Numerous listed companies filed bankruptcy.
Surfacing A Political Rift
In order to get the economy back on track, Anwar Ibrahim in December 1997 announced austerity measures, which put Mahathir’s costly 'Malaysia Inc' projects on the backburner.
Anwar’s priorities of restoring confidence and improving corporate governance got the backing of technocrats at the central bank. BNM hiked interest rates and reclassified non-performing loans, resulting in a huge increase of NPLs, many of which had been taken out by leading conglomerates.
Outstanding Private Sector Debt 1993-1997
|Year||Medium/Long-Term Debt (RM bn)||Short-Term Debt (RM bn)|
But the austerity budget and adjustments implemented by Anwar did not prevent the economy from shrinking in the first quarter of 1998. What happened next set Malaysia on a different path from its financially strapped neighbors.