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.


# of Listed Companies
New Shares (RM bn)
Market Capitalization (RM bn)
1993 1275.32 387.276 413 3.4326 619.64
1994 972.21 328.057 478 8.5479 508.85
1995 995.17 178.859 529 11.4376 565.63
1996 1237.96 463.265 621 15.9244 806.77
1997 594.44 408.558 708 18.2247 375.8
Source: Bank Negara Malaysia

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

Medium/Long-Term Debt (RM bn)
Short-Term Debt (RM bn)
1993 15.498 17.32
1994 24.203 14.244
1995 28.08 16.204
1996 32.973 25.17
1997 38.65 35.681
Total 61.089 43.257
Source: Bank Negara Malaysia

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.

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.