Before the 1997 Asian Financial Crisis, Malaysia had a large current account deficit of 5% of its GDP. At that time, Malaysia was a popular destination for investment. The general performance indicators of the Malaysian economy were very auspicious due to its high growth, virtual full employment, low inflation and low foreign debt. However, when the Malaysian macroeconomic conditions at the time are closely examined in light of the literature on currency crises, it is clear that Malaysia was not an innocent victim of the financial crisis (Thai contagion): it had in fact developed considerable vulnerability to a speculative attack.
Price level
The ringgit experienced a heavy selling pressure when the Thai baht came under speculative attack in mid May. In July 1997, within days of the Thai baht devaluation, the Malaysian ringgit was attacked by speculators. The overnight rate increased significantly from under 8 percent to over 40 percent. Thus, this led to rating downgrades and a general sell off on the stock and currency markets. By the end of 1997, ratings had fallen many notches from investment grade to junk, the KLSE (Kuala Lumpur Stock Exchange) had lost more than 50 percent from above 1,200 to under 600. Between the first week of July 1997 and 7 January 1998 the ringgit depreciated against the dollar by almost 50 percent. The ringgit fall from above 2.50 to under 4.57 (on Jan 23, 1998) to the dollar.
In the second quarter of 1997, the net quarterly flow of portfolio capital turned negative for the first time after 1991 and total net outflow in the first three quarters of the year amounted to over US$ 11 billion. Reflecting the massive reversal of portfolio capital flows, by the end of 1997 the composite share price index of KLSE had fallen by over 50 percent from the pre-crisis level, wiping off almost $225 billion of share values. However, given the low foreign debt exposure of domestic financial institutions, for a while the Malaysian policymakers were able to muddle through.
Unemployment rate
The Malaysian economy was in recession by August 1998. National account released in the last week of August exhibited a contraction of output by 2.8 percent and 6.8 percent in the first two quarters respectively. While employment growth had been growing stably at 4.9 and 4.6 percent in 1996 and 1997 respectively, it contracted by 3 percent in 1998. The number of workers retrenched in domestic manufacturing surged from 19 thousand in 1997 to above 83 thousand in 1998. For the whole of 1998, the number of retrenchments was 83,865, a significant increase from the 19,000 number of retrenchments in 1997. And also, the unemployment rate increased from 2.6 percent in 1996 to 3.9 percent in 1998.
Inflation rate
The 1997 Asian Financial Crisis also had an impact on the inflation rate of Malaysia. Retrenchments in the domestic manufacturing lead to high unemployment rate and increasing inflation levels. Inflation levels rose as well. Before moderating, the inflation rate reached and peaked at 6.2 percent in June 1998 , exceeding the previous peak of 5.3 percent that recorded in 1991. Finally, the inflation rate was 5.3 percent in 1998.
GDP
The Malaysian GDP falls due to the 1997 Asian Financial Crisis. The contraction in GDP resulted in the slowdown of employment growth, and the rise of unemployment rate and retrenchment levels. The real GDP growth rate fell from 7.3 percent in 1997 to -7.4 percent in 1998. In 1998, the output of the real economy declined plunging the country into its first recession for many years. The agriculture sector contracted 5.9 percent, manufacturing shrunk 9.0 percent and the construction sector 23.5 percent. At overall, the Malaysian gross domestic product plunged 6.2 percent in 1998.
By the mid 1990s, market capitalization of KLSE (around US$200 billion) amounted to over 300 percent of GDP, by far the highest in the world. At the onslaught of the crisis, foreign investors accounted for only 30-40 percent of the activities in the market. Outstanding credit as a ratio of GDP increased from an average level of 85 percent during 1985-1989 to 120 percent in 1994 and then rise to over 160 percent when the financial crisis happened in mid 1997. This was the highest credit buildup among the economies of East Asia.
Real Economy Indicators for Malaysia
(Amount in RM billion)
1996
1997
1998
1999
GDP at constant prices
183.3
197.1
182.3
193.4
Real GDP (% change)
10
7.5
-7.4
6.1
Rate of national savings (% of GNP)
38.9
39.4
41.9
40.8
Rate of investment (% of GNP)
43.5
45.3
28.2
23.9
Investment saving ratio
1.12
1.15
0.67
0.59
Balance on current account
-11.2
-15.8
36.8
47.4
Net international reserves
70
59.1
99.4
117.2
Source: Based on Bank Negara Report 1999, Tables A.6, A.9 and A.10.
