Financial Crisis 1997 Impact to Malaysia

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TWN Global Economy Series

26

Financial Crisis and Asian Developing Countries

The Impact of the Global Financial Crisis: The Case of Malaysia GOH SOO KHOON AND MICHAEL LIM MAH-HUI

Third World Network

TWN

The Impact of the Global Financial Crisis: The Case of Malaysia

GOH SOO KHOON AND MICHAEL LIM MAH-HUI

Third World Network

TWN

The Impact of the Global Financial Crisis: The Case of Malaysia is published by Third World Network 131 Jalan Macalister 10400 Penang, Malaysia. Website: www.twnside.org.sg

© Goh Soo Khoon and Michael Lim Mah-Hui 2010

Printed by Jutaprint 2 Solok Sungei Pinang 3, Sg. Pinang 11600 Penang, Malaysia.

ISBN: 978-967-5412-28-8

CONTENTS
1 INTRODUCTION 2 MACROECONOMIC PERFORMANCE PRIOR TO THE 2008 GLOBAL FINANCIAL CRISIS Export-Dependent Economy After the Asian Financial Crisis Inadequate Investments After the Asian Financial Crisis Gross National Savings, Gross Capital Formation and Current Account Balance Persistent Fiscal Deficits 3 IMPACT OF THE GLOBAL CRISIS Impact on Finance Impact on Trade Impact on the Real Economy 4 NATIONAL RESPONSE TO THE CRISIS 5 CONCLUSIONS AND POLICY IMPLICATIONS References 1

3 4 5 8 10 13 13 21 23 27 31 37

ACKNOWLEDGMENTS
This paper was prepared as part of a Third World Network research project on financial policies in Asia directed by Yilmaz Akyüz. An earlier version was presented at the Conference on the Effects of the Global Financial Crisis on Asian Developing Countries and Policy Responses and Lessons, held in Penang, Malaysia on 18-20 August 2009 and organised by the Third World Network and Consumers Association of Penang. The authors wish to thank the following for their helpful insights and comments: Dr Chan Huan Chiang, Dr Cheong Kee Cheok, Dr Rajah Rasiah and Dr R. Thillainathan; and Ms Rosliza Musa for the graphic presentations in this paper. The usual disclaimers apply.

Chapter 1

INTRODUCTION

THE present financial crisis is very different from the one Malaysia experienced in 1998. In 1998, Malaysia suffered a contraction in Gross Domestic Product (GDP) growth due to the Asian financial crisis which originated from Thailand. In contrast, the present crisis did not start in Asia or Malaysia but is due to the weaknesses in the United States financial industry which escalated into a severe international financial crisis and deep slump in global trade and global recession by late 2008. The world’s major economies, in particular the US, the European countries and Japan, are experiencing the worst economic contraction since the Great Depression of the 1930s. Being a small open and export-dependent economy, Malaysia has not been spared from this external shock. The negative shock was transmitted to the Malaysian economy in the fourth quarter of 2008. Exports and industrial output deteriorated and investments declined. Consumer sentiment was also adversely affected. As a result, GDP growth in the fourth quarter of 2008 was significantly lower at 0.1% compared with an average of 5.9% in the first nine months of the year. It is fortunate that Malaysian banks have negligible exposure to securities linked to US subprime loans, and Malaysia’s financial institutions and banks are in a better shape today than they were during the Asian financial crisis.1 However, prominent local economists

1

Bank Negara Malaysia Annual Report 2008. 1

forecast that though Malaysia may not witness sharp downturns as compared with that of 1998, this may be a longer recession than the one in 1998.2 This paper intends to examine the impact of this global financial crisis on the Malaysian real economy sector and discuss the policy implications for the economy. Chapter 2 presents an overview of the Malaysian economy after the Asian financial crisis (AFC). This chapter shows that after the AFC, Malaysia became more export-dependent, with the external sector overtaking private investments as the main driver of growth in GDP. Private...
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