Malaysia: A Different Path
On 1 September 1998, BNM instituted foreign exchange control mechanisms that ended the free convertibility of ringgit. Traded at RM4.096 to US$1 that day, it was pegged at RM3.800 to the dollar effective 2 September. Holders of offshore ringgit accounts were allowed a month to repatriate their funds to Malaysia, effectively banning the ringgit from being traded overseas.
Anwar Ibrahim was stripped of his position as Deputy Prime Minister and all other government posts. Anwar’s shocking dismissal was aggravated by media revelations of allegations of his sexual misconduct.
Out Of The Glut
Malaysia’s capital controls were widely criticized by proponents of the free market. Others say the measures boiled down to the issue of timing. "It was done too late and was unnecessary. The motive was probably political instead of economic," says Tan of Capital Dynamics.
"Of course it’s late but something needed to be done. But the good thing was the government stood back and looked at the problem. Instead of Econs 101, Malaysia used Psychology 101 to deal with confidence," Song counters.
And it seems to have worked. From the recession in 1998, with GDP contracting by 7.4%, Malaysia swung back into a strong recovery in 1999 posting a growth of 6.1%. Share prices also started to recover.
An Expensive Lesson
Once bitten twice shy, Malaysia was quick to learn from the Asian Financial Crisis. By late 1999, trade surpluses had built up the country’s reserves, giving it the ability to shield the economy from any external shocks.
"It took them a few years to learn, but if you look at the monetary number it’s within what the IMF would consult. Malaysia doesn’t allow excesses and imbalances to build up," says Song.
Restructuring has made the banking and finance sector stronger. Malaysia currently has 10 lenders, down from 20 lenders pre-crisis. BNM wants to see this number cut by half next year.
And after seven years the ringgit’s peg to the dollar was lifted in July 2005 and replaced by a managed-float regime. The ringgit rose to a post-crisis peak of 3.38 against the dollar this year. However, the ringgit still cannot be traded globally.
Meanwhile analysts reckon the KLCI’s bull run is not over as yet, even after charting a fresh historical high of 1,391 just a few weeks ago. Many international brokerages and fund managers alike are marking Malaysia on the radar screen as one of the emerging markets to watch.