rajah rasiah 2
TRANSCRIPT
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7/26/2019 Rajah Rasiah 2
1/21
l\'Ionetary
Economics
,&
@
I
nere were
some
signs of
an overvalued
ru rrency.
Rapid credit
expa
nsion
and increased
exposure
to
the
property
sector
were
getting
worrisome.
when
it
was at
a
level
of
2.79,
to
2.43
in August
1995.
This
was
a
gain
of
almost 15
percent in
its value.
One
might
arbitrarily
take
the value
of the
ringgit
in
the
period of earlv
7994
to
early
7995
as a
benchmark
value.
It
is worthwhile
to
point out
that
the
Malaysian
economy
registered
a
substantial
current
account
deficit of
RM21.6
billion
(US$8.6
billion),
or
L0.4 percent
of
nominal
GNP
in
1995.
That
year, the balance on long-term
capital
(RM16.6
billion)
was
insufficient
to
finance the
current
account
deficit
and
the basic
balance registered
a
deficit
of
RM5.0
billion. Net private
short-term
capital amounted
to
only
RM2.5
billion and the
overall
balance
was in deficit
by RM4.4 biltion. Despite
the
overall
balance
being
in
deficit for
two
straig-ht
years
and
the fears br-
analysts
of
a
current
account blow-out, the
ringgit actually
strengthened
against
the U.S.
dollar
by
the
end
of 1995
(2.54)
compared to
year-end
1993
(2.70).
Flence,
the
ringgit
appeared
overvalued
when
the
crisis
unfolded.
5. State
of the
Banking
Sector
Despite
the
high
loans
growth
over
the
preceding few
years,
the health
of
the
banking
system
appeared to
be excellent.
At
the
end of
June
7997,
the
month
before
the
attack
on the
currency
started, the net
NPL ratio of
the
banking
system
was at
2.2
percent. The risk-weighted
capital
ratio
(RWCR)
was
12
percent, significantly
above the
minimum
requirement
of eight
percent.
Notwithstanding
the
favourable
indicators
above,
there
was
rapid
credit expansion
and
increased
exposure to the property
sector.
With
the
economy being
so
highly leveraged, it was
made more vulnerable
to
a
speculative
attack
on
its
currency
as
the
central
bank will
be
constrained
in
the
use
of the interest
rate
instrument
to defend the
exchange rate.
Also,
when
there
is
rapid
credit growth
over a short
span
of time,
especially
in
view
of
an increasing
exposure
to the
property
r"itor,
it may
not
be
prudent
as some
of the
borrowers
could be less
creditworthy. Declining
asset prices
in
an
economic
downturn would
also
pose
high risks
to banks
with loans
secured
using
property
and
shares as
collateral.
The
central bank
was
slow
in
responding
to this
uneasy
trend,
taking
corrective action
only
in
early
7997,just
months
before the
first
attack
on the
ringgit.
The
sluggishness in
policy
response
probably
contributed
to investors'
nervousness.
The
worries
over excessive
credit
expansion
through
the
banking
system
and its
implications
on
potential
bad debt
was
also
prompted
by
concerns
that
the
business
sector
is
linked
to
the
government
with
a
certain
amount
of tonnected lending'
not
necessarily
based
on
commercial
criteria.@
Athukorala
(1998a)
also
oplned that
the
reiilience
of
the
banking
system to
a
crisis may
have
been
'weakened
over the
years because
of
the
growing
dominance
of
local,
relative
to
foreign,
banks'.
Presumably,
he
was
alluding
to
the
perception
that
the
foreign
banks were less
susceptible
to
any pressure from
the
government
to influence
lending activities
@
S"" Athukoral
a
(7998a,
p.
93). Gomez,
et al.
(7997)
observed that influencing
bank
lending
activities
has been
part
of the New
Economic
Policy
(NEP)
strategy
of
restructuring
business
ownership. Athukorala
(1998a)
also
mentioned
that the
stock market has
been a
'key
instrument
used ...
to achieve the
political
goals
of
restructuring
wealth
ownership in
the economy'.
Rasiah
(2000)
argued
that the NEP
cultivated
cronyism
that was driven
by patronage
rather than
performance.
\_
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7/26/2019 Rajah Rasiah 2
2/21
The Use of Monetary
Policy
in
Crisis
Management
compared to local banks
and, thus, had a lower risk
profile.
This
perception
seemed to be also prevalent among
depositors
at the end
of
7997 and
early
1998 when
smaller
(domestic)
financial
institutions
faced
withdrawals
from
concerned depositors
and experienced some problems
with
their
liquidity.o
Apart from
the risks
associated
with
the
banking
system,
the
question
of
the independence
of
the central bank
(and
the related issue
of
credibility) was brought
to the
fore. Athukorala
(7998a),
for
example,
observed
the
'long
silence
of
BNM'
on
the
issue
of
rapid
credit
expansion
until
just
months
before
the
onset
of
the
first
attack
on
the
ringgit in mid-
1997.
The indications
are that
the central bank had been
guilty of
a lax
monetary
policy
in
the
period
prior
to the
crisis.
6.
Build-up
of
External
Debt
External
debt
exposure
of the
economy was
not
very high
at
the onset of
the
crisis.
Total
external debt
outstanding amounted
to RM101.2
billion
at
the
end of
March
1997
(38.8"h
of
GNP;
140.3%
of
net
international
reserves),
of
which
71.5
percent was
medium
and
long-term
deb|
the
remaining
28.5
percent
being short-term
debt.
However, it is
noted that
there was a
steady
build-up
of external
debt
ffi
by the
private sector
and the
non-financial
public enterprises
(NFPEs)
starting
from
7992. Private
sector
medium
and
long-term
external debt
rose
from
RM5.4
billion in
March
7997
loRM37.7
billion
in
June
1997,
an increase
of almost
seven-fold. The
NFPEs
started accumulating external
debt
from
1993
onwards-medium
and long-term debt
rising from RM12.0
billion
in
March
1993
to
RM32.5 billion
in
June
7997;
an increase
of
2.7
times. As
for
short-term external
debt
exposure, the
banking
sector's debt rose
from
RM11.3 billion
in
December
1995 to RM27.B billion
in
June
7997;
an
increase
of almost
2.5 times
over
a
short period of
L8 months.
The rapid build-up in
external debt
in
the
years
preceding
the
crisis
in
7997
was
probably facilitated by
a
very
stable exchange rate
of
the
ringgit
against the
U.S.
dollar.
During
this period,
domestic interest
rates
were
not
very high;
otherwise
there
would
have
been added incentive to borrow
more
from abroad.@
G*
WW
ONSET OF
THE
CRISIS
From
the
earlier section,
it
was clear
that
there were several signs of
vulnerability in
the
Malaysian
economy
prior
to the
currency
crisis
in7997.
0
To a significant extent, this perception that
the
foreign-owned
banks are less exposed
to risks may have been
justified
if
one looked at the list
of
banks which
sold NPLs
to Danaharta
(the
asset
management
company
set
up to
help in
cleaning up bank
balance sheets)
-
most of the foreign banks
did not have to do so. For a
couple
of
foreign banks which did
so, the
value
of the
loan
rights acquired amounted to only
0.15
percent of the total for the
period
June-December
1998.
(Source:
Danaharta,
^
Operations
Report: 20
June
7998-Sl December 1998)
@
1o*o
(7gggb,
p.
183) noted that much
of
the foreign
debt was dollar-denominated,
short
term and unhedged'.
There was
a
steady
build-up
of
external debt b'i'
.
the
private
sector
and the
NFPEs.
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7/26/2019 Rajah Rasiah 2
3/21
l,lcneiar\.
Economics
The crisis
in Thailand
threatens
to spill
over as
investors
got
nervous.
x/
The
ringgit
plunged
to an all-
time
low against
the
U.S.
dollar in
early
1998.
Together
with
the
ringgit
depreciation,
the
stock
market
plunged.
*
Following
the Thai
baht
tumble,
this
caused
serious
concerns
for investors'
particulaily
portfolio
investors.
This
was
no doubt
influenced
by
the
facr
that
most
of the
international
financial
community
had
failed
to
perceive
the
very
real
risks
in
some of
the
crisis-hit
economies.
Ouattara
(1995
remarked
that
'in
hindsight, it
is
clear
that most
of
these
(capital)
inflo\\-'
(to
East
Asian
economies)
did not
show
sufficient
concern
for
the
potentia,
risks'.
Thus, once
the
Thai crisis
started
to
become
full-blown,
the
prospecl:
for
self-fulfilling
panics were
rife.
As
Dornbusch
(1998) so
aptly put
it:
,vulnerability
is
in part
an objective
fact
but,
just
as
in
the
case
cr
bank
runs,
in part,
it
is
in
the
eyes
of
the
beholder.'
,Safety
first
is
the
motto of
investors
when
they
smell
a
rat.
Thus, one
vulnerable
economy
after
another
tumbles.'
Ringgit
Fell Under
Pressure
Since
March
7997, the
ringgit
fell
against
the
u.s.
dollar
and
most
of
the
major currencies.
From
a level
of
2.48
against
the
U.s.
dollar
in
March
speculative
attacks
on
the ringgit
saw
it depreciating
to
an
average
tf
Z.SZ
inJuly.
By the end of
that
year,
the
ringgit's
exchange
rate against
the
greenback
had
plunged
to an astonishing3.77.
The
worst
had yet
to
come
In early
January
1998,
the
ringgit
sank to
an
all-time
low
of
4.88
agains:
the
U.S.
dollar.
This
triggered
the
panic
button in
the
business
sector
as
well
as
among
policymakers.
In
August,
the ringgit
was
at
an
average
c:
4.20
against
the
greenback.
This
was
prior
to the
announcement
o{
the
capitaicontrol
mJasures
on
1 September
and
the
subsequent
fixing
of
the
"*"hutlg"
rate at
3.80
to
the U.S.
dollar
the
next
day'
Stock
Market
Plunged
with
confidence
on
the ringgit
shattered,
investors
in the
stock
market
began
mass
selling
on the
KLSE,
causing the
market
to
tumble.
The
KLSE
Colnposite
Index
IKLSE
CI),
which
stood
at
1,,216.7
points
at
the
end
of
lanuiry
1997, ended
the
year at
894.4
points.
In
August
1998,
the
month
tefore
the
imposition
of
the capital
control
measules,
the
KLSE
CI
was
just
302.9
points.
Average
daily
turnover
had plunged
from
about
RM2-3
tiliior"r
in
the first
three
months
of
1997
to
just
RM193
million
in
August
1998.
The
market
capitalisation
of
the
KLSE,
at
RM826
billion
in
Januarr-
7997,had
shrunk
to
RM200
billion
in
August
1998.
Most
would
agree
that
the
ringgit
had
fallen
way
beyond
what
one
might
term
aS
reflective
of
economic
'fundamentals'.
The
circumstances
in which
the
regional
currency
turmoil
occurred
and
the
resulting
sentiments
that
uppeaied
to
influenie
fund
managers
and
currency
traders
were
indeed
r-iq.t".
with
the
seed
of
the crisis
sown
in
the
dramatic
fall of
the
Thai
baht
andihe
Korean
won
following
closely,
stock
market investors and currencr-
traders
wele
shocked
at the
apparent
lack
of
prudential
supervision
on the
part
of
the
authorities.
Added
to
this,
there
were
instances
pointing
to poor
'r11unug"*"r1t
of
the
economy
and
allegations
of
lack
of
transparency.
To
be
fair,
sJme
of
these
allegations
were
well grounded
in
some
countries.
This,
coupled
with
an obvious
lack of
ability
to
differentiate
the
circumstances
between
the
various
economies
in
the
region,
resulted
in
market
players
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7/26/2019 Rajah Rasiah 2
4/21
I
The Use
of
Monetary
Policy
in
Crisis
seeking
to
highlight
similarities
with
the
Thai
and
Korean cases.
The
result
was a
massive
sell-down
of stocks
and the
dumping
of
domestic
currencies.
Both these
developments
fed on
each
other.
It was a
typical
demonstration
of
herd
behaviour
by fund
managers
and curlency
tradels
alike.
To
a
certain
extent,
there
were
probably
self-fulfilling
prophecies.
These
were
augmented
by
imperfect
knowledge
of country-specific
circumstances
and
unlavourable
sentiments
partially
fed
by
the
inappropriate
handling
of
the crisis
by
some
governments
at
the
initial
stage.
The
vulnerabilities
in
the
Malaysian
economy
highlighted
in
the
earlier
section
caused
investors
to become
nervous over
potential
problems
in
the
economy,
following
the
Tha
i baht
debacle.@
The falling
ringgit
and the
stock
market
collapse
reinforced
each
other's
downward
momentum
and
had
a
profound
impact
on
businesses.
The
financial
system,
in turn,
was
hit by
the
rising
number
of
business
failures
or
company
closures.
The much
weaker
ringgit
also
inflated
the
size
of
foreign
debt
obligations.
Dannpened
Business
Confidence
and
Gonsumer
$entiments
What
started
out
as an
exchange
rate
problem
that some
initially
thought
to
be
transitory
quickly
exerted
a
negative
impact
on
the
real
sector.
Following
the onset of
the
crisis
in
mid-1997,
beginning
from
the
third
quarter
o]
thut
year
up until
the
first
quarter
of
7998,
business
confidence
oJ
manufacturers,
as
gauged
by
the
Malaysian
Institute
of
Economic
Research's
(MIER)
Business
Conditions
Index
(BCI), dipped
sharply
for
three
consecutive
quarters.
Likewise,
the
impact
on
consumer
confidence
was
telling.
The
MIER
Consumer
Sentiments
Index
(CSf
plunged
for
four
conseiutive
quarters
beginning
in
the
third
quarter
of
1997
until
the
second
quarter
otlggl.
The
index
reached
an
all-time
low
in
2Q:98
and
the
quarterly
drop
in
the
previous
quarter
was the steepest
recorded
since
the
inception
of the survey.
?e
..
Busi
ness
confidence
as
.
well as
consumer
sentiments
took
a
bie
hit.
W
rNrrrAL
PoLrcY
REsPoNsE
The
initial
policy
lesponse
was
one
of
stabilisation
measules,
in particular
to
address
the
current
account
deficit,
contain
inflationary
pressures
resulting
from
the ringgit
depreciation,
stabilise
the
exchange
rate
and
prevent
large
outflow
of
short-term
capital.
@
1o1no
(1998b)
mentioned
sending
out tonfusing
signals"
giving
the
impression
of the
,authorities,
wiliingness
to change
the rules
in'mid-game'
and,'bending
of the
rules'
in
the uEM-Renong
case,
as examples
of
undermining
confidence
and
ad-"ersely
affecting
sentiments
at
valious stages
of
the crisis.
In the
UEM-Renong
case, cash-
rich
UEM
(United
Engineers
Malaysia,
a favourite
KlSElisted
comPany
among
foreign
fund managers
up
till then)
was
allowed
to execute
a
reverse-take-over
of its
heavily-indebted
parent
firm,
Renong,
in a
move that
was seen
as
detrimental
to the
interests
of
its minority
(foreign)
shareholders.
It attracted
much bad
publicity-see
for
example,
Fox
(1998).
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7/26/2019 Rajah Rasiah 2
5/21
lonetary Economics
:
lnitial
policy
response by
central bank
was to slabilise
exchange rate,
contain inflation
and
ensure
soundness of the
:
banking system.
l
Monetary Policy
Response
In response
to
the currency crisis and
its
impact on the real
sector,
the
central
bank
implemented
several measures designed to stabilise
the
exchange
rate,
control
inflation
and
ensure
the
soundness
of
the
banking
system.
It
is noted
that
from
the very beginning
of
the crisis,
monetar)-
policy was
not
as tight as that recommended by the International Monetarl'
Fund
(IMF).
At
the onset of the crisis, the central bank's stance
in monetary
policy
has been
to keep interest
rates
at
a
relatively high level to contain
any
inflationary
pressures
arising
from
the
ringgit
depreciation.
This
was
to
maintain
positive
real interest
rates to
encourage
saving and
to
prevent capital outflow.
BNM
was
of
the opinion that
raising
interest
rates excessively
would not be
effective
in
supporting the
exchange
rate,
given the strong external
factors, and was mindful
of
the
need
to provide
sufficient
liquidity
to
finance
economic
activities. However, beginning
September
7997, when the ringgit
breached
the
3.00
level against
the U.S.
dollar
beyond
most
expectations,
the central bank
acted
to
raise interest
rates
gradually.
The benchmark 3-month interbank rate, BNM's policv
rate, was
raised
from 7.55
percent
in
mid-September
to 8.7 percent by
the
end o{
1997.
Negative sentiments {ollowing
external developments
such
as
the
deprecration
oi
the
l(orean
won
in
December
199?
and
the
ream
collapse
of
the
Indonesian
rupiah
in
early
1998 exerted
a powerful
impact
on
the
ringgit.
In 1998,
following
the
shock
decline of
the ringgit
to
4.88
against
the
U.S.
dollar on
7
January,
the
3-month
rate
rose
to ten
percent
and
further
to 11
percent in
February.
Interest
rates
were
raised
to
stem
inflationary
pressures
arising
from
the
higher
cost
of imports
and
also
to
prevent
outflow
of
short-term
capital.
In
April
7997, concerned
with the strong
growth
in bank
lending
to the
'less
productive'
sectors
and the sharp
rise
in
asset prices,
BNM imposed
quantitative
restrictions
on
loans to the
property
sector
and
for the purchase
of stocks
and shares.
Following
speculative
attacks on
the ringgit since
July
7997,banks
were
also subjected
to
limits
on
outstanding
non-commercial
ringgit
offer-side
swap
transactions
with
foreign
customers effective
4
August 7997.
However, transactions
for trade and direct
investment
were
not
subjected
to
the restriction.
The objective
was
to
reduce
the
supply
of
offshore
ringgit
used to
mount
speculative
attacks on the currency.
In
view
of the
continued
strong
credit
and
money supply
growth and
the
further weakening
of
the ringgit,
BNM enforced
further
measures
in
October
7997.
Financing on
hire-purchase
loans for the purchase
of
non-
commercial
vehicles
was
reduced
to
70
percent of
the purchase
price.
The
repayment period
was shortened
to
not more than
five
years.
Banks
were
also
advised
to prioritise
lending to
activities
such
as the export-oriented
manufacturing
sector.
Additional
lending
guidelines
were announced
in
December
1997
stating
that
credit should
not be
extended
to property
projects
which
have
not
started
construction.
As
for
on-going
property
projects,
strict selectivity
and viability
assessment
were
advised'
In
order
to
detect problem
loans early,
the
classification
of
non-
performing
loans
(NPLs)
for
banking
institutions
was
reduced from
6-months
arrears
to
3-months
arrears effective
1
january
1998. The
disclosure
requirements
for the
financial statements
of
banking
institutions
were
increased to
include
more
information.
This
was to
improve
the level
of
transparency.
re1
to
efj
thr
m(
rer
fi
uI
a\'
J-
ea
P(
re
le
P(
CI
r
bi
1
I
I
I
-
7/26/2019 Rajah Rasiah 2
6/21
The Use
of Monetary
Policy in Crisrs
Management
The central
bank
was also
determined
to ensure
that
the cost of
funds
reflects supply-demand
conditions
and that credit
be
made
available
to productive
economic
activities.
To remove
distortions
and enhance
efficiency
in
the money
market
so
that interest
rates
would better
reflect
the market's
liquidity
conditions,
BNM announced
a
number
of
monetary
measures
in
February 1998.
The
statutory
reserve
requirement
(SRR)
was
reduced from
13.5
percent
to
10.0
percent
on
16
February
7998,
to
provide
financial institutions
greater
access
to funds
that were previously locked
up
with the central
bank.
However, as a
form
of compensatory
measure to
avert
any undue easing
of
monetary
policy
due to the SRR
reduction,
BNM's
3-month
intervention
rate was raised by
100 basis
points
to
11 percent
earlier
on 6
February.
The central
bank
also
reiterated
that
tight monetary
policy
will
be
maintained
in
order
to contain
inflationary
Pressures
as a
result of
the weaker
ringgit. Following
these
measures adopted
by
BNM,
lending
rates
fell from
as
high
as
22percent in early
February
to
about 16
percent
at
the end of
February.@
Beginning
late
March
1998,
in
a move
to
enhance
transparency
and
to
enable
better supervision of
the
banking
sector,
banking
institutions
were
required
to
publish
data
to
indicate
financial
soundness
on
a quarterly
basis. These
included NPLs and capital
adequacy
daia.
They
were
also
required to
maintain, on
a quarterly
basis,
a
minimum 8.0
percent
risk-
weighted
capital
ratio.
To
further
reduce distortions
in
the
financial
system
and
improve
liquidity
managemenf
the central bank
introduced
new
features
in
its
money market
operations.
Effective
1
May
1998, the band on
the
required
balances
to
meet the
SRR
requirement
was
widened
to 2.0 percent
from
the
previous
0.5
percent.
This was to provide
banks
greater
flexibility
in
their liquidity
management.
BNM
also
mentioned that
it will
maintain
real deposit
rates at
pre-crisis
levels
to prevent
outflow
of funds, increase
savings
and stabilise
the exchange
rate.
The
first hint
of
a
change
in
the
stance
of
monetary policy
was on
1
JuIy
7998,
when
the central
bank
further
reduced
the SRR to
eight
percent.
Unlike
the
SRR
reduction
in
February,
which
was
done
to
improve
the
liquidity
situation
of some
banks,
this
was done
to reduce the cost
of
funds.
Gosrdlna&ed
FXseal
Policy
Respomse
Malaysia
had
six
years
of
fiscal surpluses up
tlII 7997.
When the crisis
unfolded
in
mid-7997
and
escalated
as
the year progressed,
the
concerns
that policymakers
had was
one of
maintaining
macroeconomic
stability
through
containing
inflationary
pressures
and
addressing the
current
account
deficit,
as well as
maintaining
investor
confidence.
Even
by the
third
quarter
of
1997,
Malaysia
was
still
experiencing
healthy economic
growth.
Thus,
the
government
budget
for
calendar year
1998,
proposed
in October
7997, showed
fiscal
restraint,
not unlike
that
prescribed
by
the
IMF
for the
other crisis-hit
countries.
In
line
with
the
anticipation
that government
revenue
will be
affected
by an
economic
slowdown,
the
Finance
Minister proposed
a
scaling
down
of
public
expenditure
through
@
Bnnk Negarn
Malnysia
Annunl Report
1998, p. 92.
lnitial fiscal
policy
response
was
one
of restraint,
consistent
with
ll\4F
prescription
for
other crisis-hit
economies.
-
7/26/2019 Rajah Rasiah 2
7/21
Llonetarv Economics
Despite the early
monetary and
fiscal measures,
the ringgit
continued its
slide.
restraining
consumption
spending
and
deferring
projects that u.er.
deemed
as non-critical,
as
well
as privatising
government activities.
-{
fiscal
surplus
of
two
percent
of GNP
was
proposed
in
Budget
1998. Then
by
December,
this fiscal restraint
was tightened further
by
implementin:
an austerity drive which
saw expenditures reduced by ten
percent across
the board
and
a further
cutback of eight percent
on
a
selective basis.
By the
end
of
March
1998,
it
was evident
to
the authorities
that
the
economy
is
slowing down
faster
than
anticipated.
Real GDP
had
contractei
in
the
first
quarter of
1998
by
1.8 percent
compared
to
a year ago
(this
u'as
later revised to
a
contraction
of
2.87').
Although
the government
reducei
the
fiscal
surplus
to
just
0.5 percent
of GNP,
it
allocated an
additional
R\11
billion
for
socio-economic
projects to benefit the more vulnerable
groups
in
society.
The
tight fiscal policy
maintained
at the beginning
stages
of
the
crisis, to a certain
extent,
may
have
been
dictated to by financial market
expectations.o
The
economic slowdown would have caused government
revenue
to
fall
and,
hence,
there certainly was
merit
in containing public
sector expenditure. Nevertheless, given
the
fact
that
the
economy
\\,as
going
into a
steep
downturn and the poor investment
climate
even then,
the
likelihood of crowding-out from
running
a
budget
deficit was much
less.
Thus,
fiscal
policy
could have played
a
more
stimulating
role
even
at
that early
stage, in
view
of
the
government's strong
fiscal
record of
the
past.@
lmpact
sf
lnitial
Poliey
Stance
Despite the
earlier
fiscal and monetary
measures,
the ringgit's exchange
rate
continued
to
be affected
by
external
factors beyond the
control
oi
policymakers. After hitting an all-time
low
of
4.88 against
the
greenback
in
early
January
1998, the
ringgit
was still
weak in
August,
when
it
was
at
4.20. The
riots
in Indonesia in May,
the weakening of
the
japanese
yen
in
june
and
the devaluation of
the Russian
ruble
all
exerted negative
impact
on sentiments on the
ringgit.
The
tight
monetary
and
fiscal
policies
allowed the current
account
deficit
in
the balance of payments
to be
contained
(subsequently
registering
a
huge surplus
for
the year due
to
a
slump
in
demand for imports)
and
also helped to
contain
inflationary
pressures
at
reasonable levels. Flowever,
@
Garnaut
(1998,p.19)
noted that there
'seemed
to
be
discordance between good policy,
on
the
one
hand, and international
market perceptions of good policy, on the other'.
iomo
(1998b,
p. 190) pointed out
that
'it
is not as
if
the government
did
not respond
at all, but
rather
that
it did not respond in the manner desired by
"the
market", i.e.
mainlv the Western financial communitv'.
@
th"
.rle of
u more
stimulating
fiscal
poli.y
*u.
noted
in
mid-1998
by
Ariff,
et
nt.
(1998a):
'...in
the
event
of
a
significant
slowdown
in
the
economy,
fiscal
policy
may
have to be more
stimulating.
The cash-strapped
private
sector
is not in
a
position to
stimulate a flagging economy. Thus, the public sector
will have to play this role. The
surplus budgets that we
had in
the past
few
years
were appropriate in light
of
the
robust
economic growth.
However,
if
the
economy
slows down significantly, then
a
mild
expansionary
fiscal policy r) /a Keynesian economics may be
in
order. ...
A
balanced
or even
a
small
deficit budget is clearly more
appropriate
than a surplus
budget under the present circumstances.'
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7/26/2019 Rajah Rasiah 2
8/21
The
Use
of Monetary
Policy
in Crtsis
llanagement
179
Detlatronarl
impact
was felt
stronglv
in the
real
economv.
"
Short
term
capital
outflows
were
registered
in
the
balance
of
payments.
&....
wThe
stock
market
continued
to
plunge.
w
4i
:'
*
-
together
with
the effect
of
a
massive
depreciation
in
the
exchange
rate and
th
negative
wealth
effect
of the stock
market
plunge,
this
was
achieved
at
the
coJt
of exacerbating
the
fall
in
aggregate
demand.
if
left
unchecked,
the
recession
would
have
become
deeper
and
the
banking
sector
saddled
with
higher
bad
debts.
That
would
have
prevented
it from
continuing
to
play
its
,ol"
us
financial
intermediary
and severely
ieopardised
economic
recovery
prospects.
-
in"
current
account
balance
turned around sharply in
the
first quartel
of
7998,
registering
a surplus
of
RM6.5
billion
compared
to
a
deficit of
RM1.9
billion
in
the
pr"rrions
quarter.
This
was
achieved
through
ihe
improvement
in
the
merchandise
balance
which
more
than
offset
the
deficit
in
the
services
balance.
However,
the
adjustment
in
the current
account
balance
was not
well
reflected
in
the
net
international
reserve
position
of
the country.
This
was due
to
the
large outflow
of,short-term
iapital
in
the
first
q.tuit"t
of
7998.
Net
private
short-term
capital
registered
a
deficit
of
RM9.2
billior-t
that
quarter.In
4Q:97,
there
was
a huge
outflow
of
RM9
billion
which
was
unaccounted
for
and
placed
under
'errors
and
omissions'.
This
item
may
well
reflect
short-term
capital
flows
(or
capital
flight)
that
were
not
captured.
Net
international
reserves
in
the
first
quarter
of
7998
declined by
RM1.9
billion.
In
the
second
quarter
of
1998,
although
the current
account
balance
showed
a larger
surplus
amounting
to
RM8.5
billion,
private
short-term
capital
again
iecorded
u
d"ficit
of
RM4.6
billion.
Nevertheless,
the
large
cuirent
account
surplus
and the
positive
net inflow
of
long-term
capital
were
still
not
well
captured
in the
net
international
reserve
position.
There
was
a
huge
negative
amount
that
was
unaccounted
for
that
quarter,
with
,errors
and
omissions'
recording
a deficit
of
RM6.3
billion.
This
may
again
indicate
a
large
net
outflow
of
short-term
capital
or
tapital
flight'.
The
outflow
of
short-term
capital
from
the
financial
system
was
linked
to
the
liquidation
by
foreign
portfolio
investors
in the
KLSE
as
confidence
wus
dampened
and
uncerlainties
increased.O
The
Co-posite
Index
of the
KLSE
plunged
from
745.4
points
in
February
1998
to
455.6
points
by
end-
|une.
However,
the
ringgit
outflow
was
also
triggered
by very
attractive
offshore
rates
of
between
20-40
percent,
which
provided
a
hefty premium
over
domestic
rates
of
about
11
percent
at
that
time.@
The
large
outflows
of
portfolio
investment
were especially
evident
in the
second
and
third
quarters
of
1998.
Due to
the
high
domestic
debt
level
in the
economy,
the
sharp
rise
in
interest
rates
by
the
central
bank
in
response
to
the
depreciating
currency
had
an
adverse
impact
on
the
business
sector
and
consumers.
Firms
that
borrowed
from
banks
had
higher
debt
obligations.
The
sharp
rise
in the
cost
of
imported
input
due
to
the
ringgit's
depreciation
also
contributed
to
the business
sectols
difficulties.
Infrastructure
projects
with
high
import
content
were
deferred.
As
the business
climate
deteriorated,
consumels
became
more
cautious
and
spent
less.
This
was worsened
by
the negative
.
.
r
1l
.,
,.i
''
.
9
Dornb.rsch
(1998) termed
this
type of
phenomenon
as
a
'liquidation
scramble'.
@
Ia i, unclear
why
such
high offshore
rates wete
offered
for ringgit
deposits
at
that
time. one
possibility
waslhat
speculators
who had
sold
the
ringgit short
(and
drove
its exchange
rate
dor.r,n)
wanted
to cover
their
forward
contract
obligations
and thus
bid
high
for
the
ringgit
but
still
made
huge profits
from
the
plunging
exchange
rate.
-
7/26/2019 Rajah Rasiah 2
9/21
lrTonetarv Economlcs
Business and
co n5u m
er
confidence
were
badly affected.
Credit
growth
reversed and bad
loans increased.
Liquidity
crunch
had
a
telling
effect on
the real
economy.
;.:
wealth
effect
following the
collapse
of
the KLSE.
|ob
losses as
companies
downsized
or
closed
also added
to
the
negative consumer
sentiments.
On top
of
all
this, the
much hoped for export
sector-led
recovery never
materialised
as
external
demand was
hampered due to
the widespread
crisis
in
East
Asia.
Japan,
which
many
crisis-affected
countries
had
hoped
to
depend on as a
growth
pole
to
puII out
of
the recession,
continued
to
be
mired
in
its
own
economic
and
financial
problems.
Following
the
economic
downturn which
affected demand
for
loans
and coupled
with the
caution
of
the banks
in
extending
further
credit,
loans
by
the
banking
system
fell sharply
in
1998
to
a contraction
of
1.8 percent or
RM7.6 billion
in
quantum
(7997:
growth
of
26.5'/"). As
more
companies
and
individuals
were affected
by the economic crisis
and encountered
problems
with
servicing
their
loans,
the
number
of
non-performing
loans
increased
The net NPL
ratio
of the
banking
system
rose from
4.1
percent
of
total
loans
outstanding
at
the
end
ol
1997
to nine
percent
as at the end of
1998.
This,
together
with
the
erosion
of
the
capital
base
of
some
banks,
restricted
the
capacity
of
some
banks
to
lend.
For
banks which
were
in
a
better position
to
lend,
their
focus on
maintaining their
asset
quality
caused
them to adopt
a
very cautious attitude.
As bank credit
became
more
difficult
to obtain,
this
affected
even
well-run
companies, especially
small
and
medium-sized
ones.
Reflecting
the
decline in economic
activities and
loans growth,
the
monetary
aggregates
continued
its downward
trend. Narrow
rnoney,
M7,
contracted by
16.0
percent
(year-on-year)
by
August
7998, while
growth
in broad
money
M2 and
M3
had
weakened
significantly
to 7.2 percent
and
4.3
percent,
respectively.
Hence,
there
was declining
liquidity in the
economy.
The
impact of
the credit and liquidity
crunch on
the real sector
of
the
economy
was
telling.
The
industrial
production index
dropped
by
77.6
percent
(year-on-year)
in August
that year
while
manufacturing
production
declined
by
14.5
percent.
The economy
started
to
contract
in
the
first quarter
of
1998.
Real
GDP
declined by
2.8
percent
compared
to
the corresponding
quarter
of
1997.
This
contraction
became
more pronounced
in
the
second
quarter
when
GDP
dipped by
6.8 percent
(year-on-year).
For the year
as a whole,
real GDP declined
by 6.7
percent.
Private
consumption
dipped
by
72.4
percent while
private
investment
slumped
by
a
phenomenal
57.8
percent.
On
the supply-side,
the
worst
hit
sector
was construction,
which
dipped
by 24.5
percent, while
manufacturing
contracted
by 70.2
percent.
In the external
sector, exports
declined
marginally
by
0.7 percent
while imports
dropped sharply
by 18.3 percent,
reflecting
the adjustment
to
a weaker
ringgit
and especially
the
dip in
private
investment.
W
cHANGE
rN
PoLrcY
srANcE
By mid-1998,
it
became clear
that the
initial
policy
response
had
perhaps
outlived
its
use.
The
changing
conditions,
especially
the
sharper than
anticipated
economic contraction
caused
by
both
depressed
domestic
demand
and sluggish export
growth,
together with concerns
of declining
-
7/26/2019 Rajah Rasiah 2
10/21
-
-
.
:EJ
J
bank
asset
quality,
suggested
an
urgent
re-thinking
of
policy.response'
Stability
ir-r
tne
io-"iil.
financiai
market
was
not
obtained
through
the
current
policy
stance
and
the
exchange
rate
continued
to
be
volatile
whilethestockmarketremaineddepressed.Continuedpursuanceofthe
fr"r"r,t
course
of
monetary
and
fisial
policies
would
most
likely
have
iu.rr"d
a
steeper
decline
in
economic
growth
and
destabilised
the
situation
further.
At
this
stage,
both
monetaly
and
fiscal
policies
needed
to
be
more
expansionary.
This
is
to
enable some
reflation of
the
economy
to provide
staUltity
for
consolidation
and
reforms
to
be
carried
out'
In
an
environment
of
extremely
volatile
exchange
rates
and
with
an
open
capital
account,
the
conduct
of
monetary
pol1cy
threatened
to
become
g',iato.t."a'Thecentralbankgrappledwitllthedilemmaoftwopossible
Sptions:
either
maintaining
hlgh
interest
rates
to
support
the
exchange
.ut"
1b.rt
without
ur-ty
urr.rrld
siccess)
and,
in
the
proc,ess'
further
choking
u.y
prorp"cts
of
economic
recovery;
or
aggressively
.easing
monetary
conditions
to
boost
aggregate
demand'
(complemented
by
a
fiscal
boost)'
b.rt
rur-t
the
very
r"ut
tlt"k
oT
seeing
the
exchange
rate
plunge'
given
the
very
negative
external
sentiments
prevailing
at
that time'
"
Choosirlg
either
option
could
prove
to
be
disastrous
as
each
was
fraught
witilextreme
.isks
that couid
lead
to
adverse
consequences.
Had
ihe
luthorities
picked
the
firsl
option,
the
economy
would
likely
have
contracted
further
and
faster
as
debts
rise
and
company
closures
cause
further
unemployment.
There
would
have
been
more
firms
and
individuals
Jefaultir-tg
orrbank
loans,
thus
causing
the
banking
system
to
deteriorate
further.
An
economy
sinking
deeper
into
recession
and
with
banks
,.r""1"g
into
difficulties
woulJhavelaced
a
daunting
task
of
stabilising
its
e"chun[e
rate
(even
with
higher
interest
rates)
as
the
risk
premium
would
rise
treinendously.
Also,
raising
interest
rates
aggressively
would
attract
mostlyshort-termcapital,theverytypeoffundsthatarenotsoughtafter
at
that
stage
due
to
its
volatile
nature'
Choos"ing
the
second
policy
option
would
probably
have
meant
more
capital
outflfw
(due
to
lower
interest
rates
and
expectations
of
further
..irr"'r.y
depreciation)
and
the ringgit,s value
falling
further. This
would
have
added
to the
cost
of
imported
i"t-tllutiot-,.
Companies
with
high
external
J"U,
"*por.rre
will
see
their
debt
obligations
rise
further.
Importers
and
"*port"i,
would
have
had
to
tolerate
increasing
exchange
rate
volatility.
The
stock
market
would
have
taken
a
further
battering
through
massive
selling
by
foreign
investors
(probably
local
ones
as
well)'
This
would
put
even
more
downward
pr",,t'i"
on
ttre
ringgit'
Importers
paying
in
foreign
currency
would
have
hedged
their
positi,ons
in
anticipation
of
further
J"pr".iutior-,
of
the
ringgitjhereby
contributing
further
to,the
fall
in
the
domestic
currency.
Opting
to proceed
along
this
path
would
have
meant
a
strong
possibility
of
u
-ulot
capital
flight,
depleting
much
needed
foreign
."r"ti"r.
A
much
*eakei
"*thutlg"
rate
(and a
very
likely
downgrade
in
sovereign
rating)
would
have been
very
costly
as
it
would
9ele"rely
hamper
the
gov?rnmeni;s
ability
to
raise
any-
external
funds
needed
for
the
fiscal
stim"ulus
and
implement
reforms
in
the
financial
sector'
Analysingtheoptionswiththeirriskfactorsintheabovepolicy-setting
environment,
it
was
obvious
that
policymakers
must
first
break
the link
between
domestic
interest
rates
and
the
exchange
rate
before
any
measures
can
be
taken
to stimulate
aggregate
demand
and
stop
the
economy
from
Tne:;"4:--
caliec
':'
:
'.-
think
of
tr.
)
polic_r' respc
r
se
"
i\4aintaining
high
interest
rates
will
choke
off
economic
activities,
but
easing
off
will see
the
exchange
rate
plunge.
-
7/26/2019 Rajah Rasiah 2
11/21
t82
X4onetary
Economrcs
Faced
with
the dilemma,
p
o
licyma kers
decided
to
break
the link
between
interest
rate
and
exchange
rate by
implementing
capital
controls.
This
enabled
the
nursuit of
expa
nsiona
ry
monetary
and
fiscal
policies
to
boost
aggregate
d,emand.
The capital
control
measures
did
not affect
foreign
direct
i
nvestment.
x
going
into
a deeper
recession.o
This can
be
done
through
capital
controls
ind
pegging
the
ringgit
exchange
rate
to
a
major
international
currencr-
such
as
the
U.S.
dollar.
The
Malaysian
authorities
decided
on this
option
on
1
Septemb
er
1998,
when
the capital
control
measures
wele
announced
and
enforced.
The
next
day,
the
ringgit
was pegged
to
the
U.S.
dollar
at
3.80.@
This
policy
option
was
chosen
so
as to
insulate
the
economy
from
the
continu"d
udt
"ir"
external
situation
and
to
regain
some
measure
of
monetary
autonomy
which
will
enable
policymakers
to
better
address
problemi
in the
economy
and
facilitate
its
recovery.
Of
particular
concern
io
policymakers
was
the
disruptive
nature
of
short-term
speculative
capital
flows
on
financial
markets
and
economic
activity.
The
capital
control
measures
did
not
disrupt
trade
and
FDI
flows,
and
the
current
account
remained
fuliy
convertible.
The September
measures
enabled
the
pursuit
of
an
expansionary
monetary
policy
and
a
complementary
fiscal stimulus
to
boost
aggregate
demand.
7;
It
is important
to
note
that
the capital
control
measures
affected
onh-
short-term
iapital
flows.
Transactions
for
trade
in
goods
and
services
were
not
affected;
neither
were capital
movements
pertaining
to
foreign
direct
investment
(FDI).
Foreign
long-term
investors
were
free to
repatriate
profits,
interest and dividenaJ.
fne
government
had
also reiterated
on
several
occasions
that
the
measules
wele
temporary
and
would
be removed
when
its
objectives
were
achieved.
indicating
that
the
measures
introduced
har-e
not
dampened
long-term
foreign
investors,
net
FDI
inflows
in
the
first
four
months
ottssg
rose
sharply
to
RM8
billion
compared
to RM9
billion
for
the
whole
of
1998.
In fact,
the
government
actually
liberalised
foreign
equitl'
investment
guidelines
in
the
manufacturing
industry,
telecommunications
and
financial
sectors
to encourage
further
FDI it-tflo*t'o
Monetary
PolicY
Further
Relaxed
As
inflationary
pressules
showed
signs
of
moderating,
monetaly
policl'
started
to
be
eased
in
August
1998.
The
steep
decline
in
loans
growth
had
to
be arrested
to
resuscitate
economic
activities.
Otherwise
a
credit
crunch
situation
will
deepen
and prolong
the
recession.
9
rni,
poinr
was
raised
by Krugman
(1998a)
and discussed
by
Athukorala
(1998b).
@
attho.rgll
capital
controls
cun
be enforced
without
fixing
the
exchange
rate,
in
this
case,
it was ob,riont
that
the
increased
certainty
from pegging
the
ringgit
at 3'80 to
US$1
was
needed
judging from
the continued
Volatility
in
the currency
markets.
Implementing
the
capital
controls
without
pegging
the exchange
rate
would
not have
sewed
the
ultimate
objective
of
providing
the
necessary
stability.
Also, given
the
severe
outflow
of short-term
capital
and the
very
high
off-shore
interest
rates
offered
for
ringgit
deposits,
the
RM
had to
be
made
non-legal
tender
overseas.
whatever
trading
in
cuirencies
will
then
be
done
only
domesticalty.
If
the authorities
did
not
fix the
exchange
rate against
the U.S.
dollar,
the tendency
for
hoarding
foreign
currency
and a
black
market
to develop
will
be great.
@
L-r
th"
manufacturing
sector,
100
percent
ownership
by
foreigners
was allowed
for
applications
received
between
31
July
1998
and
31
December
2000. The
share of
foreign
equity
investment
in the
telecommunications
sector
was
raised
to 49 percent
1or-,
u
.ur"-by-case
basls,
this can
go
up to
61 percent
for a
period
of
5 years);
in the
insurance
industry,
it was
raised
to
51 percent;
and
49 percent
in the
stockbroking
sector.
-
7/26/2019 Rajah Rasiah 2
12/21
With
the cover provided
by the capital
control measures,
monetary
policy
was
further relaxed
through lowering
interest
rates.
This
was
achieved
through
progressive
reduction
of the
statutory
reserve
requirement
(SRR)
and
the
intervention
rate
of
the
central
bank
in
the domestic
money market.
The
easing
of
monetary
policy
complemented
expansionary
fiscal
policy
in
resuscitating
the economy.
Bank Negara
reduced
its intervention
rate
rapidly
The
central
bank
reduced
its
3-month intervention
rate
three times
in
the
month
of
August
1998,
from
11
percent to 9.5 percent.
After
the
1
September
capital
control
measures,
the
3-month intervention
rate
was
lowered
more
aggressively
by BNM. From
eight
percent
in
September
1998,
it was reduced
to
six percent
in
early
ll/ay
7999.
The
Statutory Reserve
Requirement
was
also slashed
from
eight percent
to six percent
on 1
September
1998 and further
down
to
four
percent
on
16
September.
The liquid
asset
requirement
of
the
commercial
banks was also
reduced
by
200 basis
points in
early September.
BLR
framework
revised
The
formula
for
computation
of the
base lending
rate
(BLR)
was
revised
on
1
September 7998.Instead
of being
based
on the
3-month Kuala
Lumpur
interbank
offer rate
(KLIBOR),
it
was then
based
on the 3-month
intervention
rate
of
Bank
Negara Malaysia.
This
ensured
a more
speedy
transmission
of
changes
in monetary
policy via
the interest
rate
tool
to the
lending
rate
of
banks.
The flat administrative
margin
of 2.5
percent
was
also reduced
by
25
basis points.
The
maximum
margin
over
the quoted
BLR
was
lowered
by 150
basis
points, from
four
percent
to
2.5
percent.
Loans
growth
target
set
for
banking
institutions
The
central
bank
also
enforced
a
loans
growth
target
of
eight percent
to
be met
by
the
banking institutions by
year-end
1998.
Subsequently,
when
it
became
clear
that
in view
of
the
sluggish
loans
growth
in
the first
three
quarters
of
the
year,
the target
cannot
be
met,
BNM
changed
its
stance
to
that
of
encouraging
banking
institutions
which
have
the
capacity
to
meet
this
target
to do
so. The
iarget
date for
the
eight
percent loans
growth
was
then
more realistically
set
at
year-end
1999.
This
was
also
an industry
target and
BNM
reiterated
that
it
did
not intend
to
irnpose
the
target
on
each and
every
single bank.
Relaxation
of credit
terms for
purchasing
property
The
construction
sector
was
perhaps
the
worst
hit by the
crisis.
To boost
the
sector, BNM
relaxed
the
credit
ceilings
imposed
earlier
on the broad
property
sector.
With
effect
from
7
September
1998,
lending
for
the
construction
or
purchase
of
residential
properties
costing
up
to
RM25e000
were
exempted
from
the
20
percent
loan
limit
for
the
broad
property
sector.
From
5
october onwards,
the
60
percent
maximum
margin
of financing
was
lifted
for
the purchase
of non-owner
occupied
residential
propertiei
costing
RM150,000
and above,
as
well
as
the
purchase
of
shophouses
costing
RM300,000
and
above
which
were
not
used
for
doing
one,s
own
business,
and
also
for
the
purchase
of land.
The
Use of Monetary Policy in
Crisis
Management
183
Nlonelar\
pcl
(,
llas furtner
t::.
through lor,
er'
'':
of interest
rates
and
other
ad
min istratir
e
measu res
-
7/26/2019 Rajah Rasiah 2
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Monetary
Economics
Relaxation
of
credit limits
for
the purchase
of
shares
To
boost
the
stock
markef
the
credit
limit
on loans
for
buying
shares
and
unit
trust
funds
was increased
from 15
percent to 20
percent
of total
outstanding
loans
for
commercial
banks
and
finance
companies
on 23 septemb
er
1998.
The merchant
banks'limit
of 30 percent
remained
unchanged.
Easier
financing
for purchasing
cars
The
car
industry
was
also
badly
affected
by the
economic
downturn,
with
sales
of
passenger
cars
plummeting
by
about
60-70
percent in
the
first
three
quarters
of
1998.
To help
sales
pick
up,
the
margin
of financing
for
all
passenger
cars was
increased
from
70
percent
to 85
percent
effective
from
23
April
1998.
This
was
further
boosted
by
another
measure
on 28
July,
when
the
restriction
on the
maximum
repayment
period
was
removed.
Then
on
21
November,
the
margin
of
financing
of
85 percent
was abolished.
Banks
could then
fix
the
percentage
of financing
given
to its
customers based
on
their
own credit
assessment.
Assisting
smaller industries
and
the lower-income
groups
To
assist the
small and
medium-scale
industries which
are
more
vulnerable
to
the
crisis,
BNM
cut the
maximum
lending
rate
under
the Fund
for
small
and
Medium
Industries
from
ten
percent
to
8.5
percent. To
alleviate
the
burden
of
the lower
income
groups, the
same
was
done
for
the
Special
Scheme
for
Low
and
Medium
Cost Houses,
lowering
the
funding
rate
from
eight
percent
to six percent.
Easier
credit
terms
for
credit
card holders
To
boost
private
consumption,
the
central
bank reduced
the
minimum
monthly
repayment
on
credit
cards
by
a
whole
10
percentage
points,
from
15
percent to five
percent
effective 20
November
1998.
with
effect
from
30
December
1998,
the
maximum
finance
charge
per month
cannot
exceed 1.5
percent
(or
18%
per
annum).
Curbing
finance
on certain
types
of new
property
development
Due
to
the
glut
in
certain
segments
of the property
market,
there
was
a
need
to
clear the
backlog
of properties.
From
5
Janu
ary 1999,bank
financing
was
not
allowed in
the development
of
new
residential
properties
and
shophouses
which
cost
more
than
RM250,000
each.
Financing
was
also
curbed
in
the development
of hotels,
office
buildings,
resorts,
clubs,
shopping
complexes and
golf
courses.
Liquidity
improved
and
interest
rates
declined
The
benchmark
3-month
interbank
rate,
which
peaked
at
11.3
percent
in
May-]uly
1998,
ended the year
at an
average
of 6.48
percent
in
December.
It
stood
at
around
3.2-3.3
percent
inJuly
1999.
One-week
money
and
overnight
money/
which
soared
to
a
height
of
35
percent
and S0
percent
inluly
1997
(when
BNM
unsuccessfully
tried
to
defend
the
ringgit
against
speculative
attacks),
declined
to an
average
of
5.85
percent
and
5.41 percent
respectively
in
December
7998.
The
3-month intervention
rate
of BNM,
at a
peak
of 11
percent for
much
of 7998,
stood
at 6.0
percent in
June
1999. This
lowered
the
b
1
tt
ir
T
I
rl
5
t
e
tr
a
a
i:
a
a
t
-I
t
c
c
:q
e
1
I
-
7/26/2019 Rajah Rasiah 2
14/21
''
,
-,
i'
r-"
-
-
_
.l
The Use of
Monetary
Policy
in
Crisis
\{anagement
185
base
lending
rate
(BLR)
of commercial
banks
to
8.04 percent
in
December
1998,
from
a
height of
72.27 percent
in
june.
This
lowering
of
interest rates
:
-;
::--ncnic
reco\rery would not have been possible
had
it
not
been
:,-: ine
capital
conttols
and
the
fixrng
of
the
ringgit
exchange
rate.
3
"d
Financial
Sector
Restructuring
Tne
capital
control
measures and
pegging
of the exchange
rate
were
done
:. rt to merely bolster the
economy
by pursuing
a
high
growth
policy
per
:r,
Following this route
would
have been
a
mistake
as
there
will
come
a
.ime when the
authorities
may need to
lift the capital
controls
and float
the
erchange
rate again.
If efforts
to
improve
economic
efficiency
and
reforms
,o
clean
up
and
strengthen
the financial
sector
were not
done
promptly
and
effectively,
then
the breathing
space that
the September
1998 measures
accorded
Malaysia
would have gone
to waste.
Hence,
the government
put
rn
place
a
comprehensive
programme
to
reform
its banking sector
and
accelerate
progress
in
the
implementation
of these
reforms.
Although
the
bankingsystem
entered
the crisis
in what
appeared
to be
a
strong
position,
with a
low
NPL
ratio and
adequately
capitalised
(above
the
minimum
required
level),
it
was
in
a
position
of
some
vulnerability.
This was made
more evident
when the currency
crisis
dragged
on and
the
economy
worsened.
The lax
monetary policy in
the
years
before the
crisis
had
allowed
high
loans
growth
to continue
unabated.
It
was not
until
early
1997,
months before
the
first
speculative
attack on
the
ringgit,
that the
central
bank
acted
to
curb excessive
credit
expansion
to
certain
vulnerable
sectors such
as the broad property
sector,
loans
for
the purchase
of stocks
and
consumption
credit.
Thus,
by
7997
the banking
system
had
a high
loan
exposure.
Bank loans also
constituted
a
large
portion
of
the
financing
requirement
of
the economy.
The increased cost
of capital
and
higher cost of
imports
(particularly
imported
input for
the business sector)
steadily
took
its toll on companies.
The
deflationary impact
exerted
itself
on
the
asset
quality
of
the
banking
system. By end-June
1998,
the NPL ratio of
the
banking
system
had
risen
to
8.9
percent of
total
loans.
Banks became
concerned
with
their
balance
sheets
and
huge bad debts
for some
banking
institutions
had begun to
cause
worries about
their
capital
adequacy.
Resulting
from
this,
bank
loans
growth
began
to slow
down
rapidly and
even
sound
companies
then
ran
the
risk
of being
unable
to
obtain much needed credit.
These problems
had
to be addressed
quickly.
Together
with an
appropriate
macroeconomic
policy, a programme
for
restructuring
the
financial
system
was
absolutely
crucial
in
the recovery
process.
This was
done through
establishing
an asset
management
company
(Pengurusan
Danaharta
Nasional
Berhad),
a
special
purpose
vehicle for
recapitalising
ailing banks
(Danamodal
Nasional
Berhad), and
the Corporate
Debt Restructuiing
Committee
(CDRC).@
A programme
of
bank
mergers was
also announced,
in
order to
create
bigger
and
stronger
banking entities
better
able to
face
shocks.
The
functions
of
Danaharta,
Danamodal
and the CDRC
are briefly
discussed
as
follows.
@
See
Rasiah
(2001).
A comprehensive
reform
programme
for
the banking
sector
was
needed.
An asset
management
company
and
a
special
purpose
vehicle for
recapitalising
ailing
banks
were
set
u
p.
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7/26/2019 Rajah Rasiah 2
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Monetary
Economics
Danaharta
Pengurusan
Danaharta
Nasional
Berhad (or
Danaharta)
was
established
on
20
June
1998; lts
function
being
to
purchase
non-performing
loans
(NpLs)
from
banking
institutions
so
that they
can
be
free
to
concentrate
on
their
lending
activities
in order
to facilitate
the
economic
recovery.
Danaharta
also
aimed
to
maximise
the
recovery
value
of
these
loans.
Danaharta
was
given
statutory
backing
to
perform
its
functions.
In
its
operations,
it
adopted
a
market-based approach
and published details of
its
acquisitions,
including
the
amount
of NPLs
acquired
from
individual
financial
institutions
and the
average
discounts
apphea.
In
its acquisitions,
Danaharta
gave
priority
to
the
weaker
financial
institutions.
This
included
those
seeking
recapitalisation
from
Danamodal
Nasional Berhad
(or
Danamodal).
It
also
managed
loans
of selected
financial
instituti.ons
on behalf
of
BNM
or the
government.
This
was
done
to facilitate
mergers
between
identified
financial
institutions
by
preserving
the
strength
of the
acquiring
institution.
Danaharta
did
not
purchase
ai
the
NPLs
of
the banking
institutions
but
the remaining
poition
was
at
manageable
levels.
However,
banking
institutions
with
a
gross
NpL
ratio
exceeding
ten
percent
had
to
sell all
their
eligible
NpLs
to
Danaharta.
otherwise,
the value
of
these
loans
would
have
to be
written
down
and
restructured.
Banks
which required
recapitalisation
from Danamodal
also
had
to sell
their
eligible
NPLs to Danaharta.
In
acquiring
NPLs
from
the banking
institutions,
Danaharta
also
performed
its
other
role
of assisting
in
corporate
sector
restructuring.
This
was
because it
had the
power
to
impose
conditions
on borrowers,
for
eximple
in
matters
pertaining
to
restructuring
of assets
and
improving
cash
flows.
It was
also
vested
with
the authority
to
appoint
'special
administrators'
into
viable
companies
facing
temporary
cash
flow
problems.
It
has
to
be
stressed
that Danaharta
purchased
NpLs at
fair
market
value,
which
often
meant
that
banking
institutions
selling
their
eligible
NPLs
incurred
losses.
As
payment
for
NPLs
acquired
from
the financial
institutions,
Danaharta
paid
cash and/or
issues
zero-coupon
tradable
bonds
which
were
government-guar