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DEC5028 MACROECONOMICS

Assignment:

The Asian Economic and Currency Crisis and its World

Repercussions: A Country Study

MALAYSIA & BRAZIL

DP 51-52

Group Member:

No. Id Name1 1111114363 Nur Assyiddiq Bin Zainal

2 1111114082 Mohamad Rizal Bin Zainon Abidin

3 1111113370 Muhammad Syamir Bin Ismail

4 1101107242 Cheong Wan Qian

5 1111112040 Puteri Nurul Syakinah

Lecturers Name: Ms. UMMU UMAIRAH BINTI MOHD YUNUS

Marks/ 5


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COUNTRY INTRODUCTION

Malaysian currency crisis 1997-1998

The Asian financial crisis was a period of financial crisis that gripped much of Asiabeginning in July 1997, and raised fears of a worldwide economic meltdown due to financial

contagion. The Economy of Malaysia is a growing and relatively open state-oriented and

newly industrialised market economy. The state plays a significant but declining role in

guiding economic activity through macroeconomic plans. From 1988 to 1997, the economy

experienced a period of broad diversification and sustained rapid growth averaging 9%

annually. Before the crisis, Malaysia had a large current account deficit of 5% of its GDP. At

the time, Malaysia was a popular investment destination, and this was reflected in KLSE

activity which was regularly the most active stock exchange in the world (with turnover

exceeding even markets with far higher capitalization like the New York Stock Exchange).

Expectations at the time were that the growth rate would continue, propelling Malaysia to

developed status by 2020, a government policy articulated in Wawasan 2020. At the start of

1997, the KLSE Composite index was above 1,200, the ringgit was trading above 2.50 to the

dollar, and the overnight rate was below 7%.The year 1997 saw drastic changes in Malaysia.

Foreign direct investment fell at an alarming rate and, as capital flowed out of the country,

the value of the ringgit dropped from MYR 2.50 per USD to, at one point, MYR 4.80 per

USD. The Kuala Lumpur Stock Exchange's composite index fell from approximately 1300 to

nearly merely 400 points in a few short weeks. In 1998, the output of the real economy

declined plunging the country into its first recession for many years. The construction sector

contracted 23.5%, manufacturing shrunk 9% and the agriculture sector 5.9%. Overall, the

country's gross domestic product plunged 6.2% in 1998. During that year, the ringgit plunged

below 4.7 and the KLSE fell below 270 points. Growth then settled at a slower but more

sustainable pace. The massive current account deficit became a fairly substantial surplus.

Banks were better capitalized and NPLs were realised in an orderly way. Small banks were

bought out by strong ones. A large number of PLCs were unable to regulate their financial

affairs and were delisted. Compared to the 1997 current account, by 2005, Malaysia was

estimated to have a US$14.06 billion surplus. Asset values however, have not returned to

their pre-crisis highs. In 2005 the last of the crisis measures were removed as the ringgit was

taken off the fixed exchange system. The powerful negative shock also sharply reduced the

price of oil, which reached a low of about $11 per barrel towards the end of 1998, causing a


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financial pinch in OPEC nations and other oil exporters. The reduction in oil revenue also

contributed to the 1998 Russian financial crisis. It was the start of a chain reaction in which

half a dozen other economies of the region suffered speculative attacks and had their

currencies devalued. As a result, stock markets fell as local companies debts and profit

forecasts were reviewed under the new exchange rate rgimes.

Brazil currency crisis 1997-1998

Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s. IN

1998 and 1999, the majority of Latin American countries suffered a severe economic

recession that drove corporations into insolvency and thus forced many to close down. Brazil

had its own problem before the Asian economic crisis. Before the crisis, a decade of inflation

rates ranging from 100% to nearly 3,000% per year, Brazils central bank made an effort

during the 1990s to reign in inflation and public spending. In 1994, the government reissued

the real and instituted a crawling peg. The new currency, in combination with interest rates in

excess of 30%, stabilized inflation for the first time in decades. High interest rates lowered

inflationary pressures, by reducing the incentive to hold currency. Investors, attracted by high

interest rates, poured money into the Brazilian economy at unprecedented rates. Brazilian

stock markets enjoyed an upward trend during the whole first semester of 1997. FromJanuary 1stto July 8th1997, when it reached its annual high, the Ibovespa, the Brazilian main

market index, rose from 7,040 points to 13,617, a spectacular rise of 93.4%. While this flow

was positive, emerging market economies experienced growth, since this capital financed

imports, credits to the private sector, consumption credits for individual citizens and, also, the

cash for external debt payments. However, short-term capital has a speculative, volatile and

erratic character. This is evident from the abrupt decrease of the flows, which started from

1996, continued in 1997 with the Asian crisis, and deepened in 1998 with the Russian crisisand in 1999 with the Brazilian crisis. The Asian crisis spilled over quickly, via Russia, to

Brazil - thus, to Latin America. Brazil had economic policies similar to those put forward in

East Asia, maintaining high interest rates to attract capital, with the purpose of defending the

fixed exchange rate tied to the dollar. In July 15th1997, marked the opening of a new, and

grimmer period as the Asian crisis take effects. Foreign direct investment grew by 140% over

the year before. The recession also caused the deterioration of the banking systems financial

situation and massive lay-offs that increased the existing unemployment level and caused the

loss of purchasing power among large sectors of the population. The Hong Kong stock


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market crash, at the end of October, effect also reached Brazil immediately. By the end of the

week the index had accumulated a 15% loss. The next seventy days were a period of very

high volatility, during which Ibovespa had many up and downturns around the average of

roughly 12,000 points. The crash on October 23rd caught most players in the domestic

financial institutions off-guard, after some three weeks in which the market gained upward

momentum, as fundamental prospects for the Brazilian economy seemed to be improving.

Thus resulting in a loss of one third of market value after the crisis.

ECONOMIC INDICATORS

1.1 Real Output Growth

Malaysias real Gross Domestic Product (GDP) growth is expected to moderate to 8%

in 1997 (1996: 8.6%). The moderation in output growth is mainly due to an envisaged slower

pace of economic activities in the second half of the year as a result of slower construction

starts and output growth of construction-related manufactured materials and services. Output

growth of consumption goods, especially durables, is also envisaged to expand at a slower

pace due to the combined impact of slower growth in export earnings, fiscal prudence,

monetary restraint, effort aimed at promoting and mobilizing saving as well as the determent

of spending in response to the depreciation of the value of ringgit and deflation of share

prices. The moderation in domestic demand growth against a slower but still robust output

growth has enabled inflation to remain low, despite the weaker ringgit.

Global growth in 1999 seems likely to be in the range of 2percent for the second

consecutive year, well below the historical average of nearly 4 percent. This underscores the

continuing costs ofthe Asian crisis, its repercussions, and the crises thathave afflicted

financial markets more broadly in1998. At the same time, the balance of risks still seems to

be predominantly on the downside. Projected growth in the world economy in 1999 has been

lowered only modestly from the October 1998, about the same growth rate as estimated for

1998. The recession now appears deeper and longer than previously projected, and in other

countries reflecting the crisis in Russia and the subsequent contagion to other emerging

markets, including Brazil.


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1.2 Inflation

1997-1998 with projected slower growth in domestic demand as well as the pursuance of

fiscal discipline and monetary restraint, inflation is likely to remain low. The depreciation of

the ringgit is not expected to push up the price of imports significantly, as slower growth in

the volume of world output especially manufactured goods is expected to force producers

worldwide to cut prices in order to get a greater market share, as evidenced in the recent

decline in the prices of electrical and electronics products. More conscious efforts in

procuring imports from cheaper sources as well as to generate local substitutes to alleviate the

impact of ringgit depreciation would also contribute to keep imported inflation in check.

The inflation rate in Malaysia was recorded at 1.4 percent in July of 2012. Historically,

from 2005 until 2012, Malaysia inflation rate averaged 2.7 percent reaching an all-time high

of 8.5 percent in July of 2008. Inflation rate refers to a general rise in prices measured against

a standard level of purchasing power. The most well-known measures of inflation are the CPI

which measures consumer prices, and the GDP deflator, which measures inflation in the

whole of the domestic economy. Besides that, the inflation rate in Brazil was recorded at 5.2

percent in July of 2012. Historically, from 1980 until 2012, Brazil inflation rate averaged419.3 percent reaching an all-time high of 6821.3 percent in April of 1990 and a record low

of 1.7 percent in December of 1998. Inflation rate refers to a general rise in prices measured

against a standard level of purchasing power.

1.3 Openness

Propose that can have a positive impact on growth, but openness may not

automatically lead to growth. A problem of economic openness is not less openness but more

openness. There is nothing wrong with Malaysia being so trade dependent; it cannot afford to

be otherwise. The question, rather, is whether the Malaysian economy is too trade dependent

for its own good. Rhetoric aside, the optimum trade level relative to a countrys GDP can

only be determined by market forces, not by administrative fiat. For market forces to work

effectively there is a need first to eliminate all distortions in the market place.


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1.4 Savings

Productivity can also be increased by ensuring a more efficient utilization of available

resources by both the public and private sectors. Therefore, in the conduct of fiscal and

monetary policies, the major thrusts are to promote savings and reduce wastage so that a

larger portion of national resources can be channeled for more productive investment.

1.4 The balance of trade

Balance of trade Malaysia:

Year

Trade

Balance

(RM Billion)

1997 10.15

1998 11.34

1999 33.36

2000 61.81

2001 54.05

2002 54.34

2003 81.35

2004 81.62

2005 103.36

2006 111.09

2007 102.26

2008 143.21

2009 117.85

2010 109.99

2011 120.32


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1.5 Current account

Current account deficits peaked at around 10 percent of gross domestic product (GDP) in

Malaysia in 1995 and at 8 percent of GDP in Thailand in 1996 (compared with 7 percent in

Mexico around the time of the peso crisis in 1994). Deficits were also large in the Philippines

and Indonesia, at around 4 percent of GDP. During the crisis years of 199798, deficits

became surpluses that persisted for years (in the Philippines this occurred much later).

Malaysias surpluses rose to around 15 percent of GDP after its crisis, whereas they declined

in Thailand (turning to a small deficit for a time) and Indonesia. The current account reversals

to surpluses were associated with a sudden stop in capital inflows. From 1999 until 2011,

Malaysia Current account averaged 18277.8 Million MYR reaching an all time high of 38598

Million MYR in September of 2008 and a record low of 5366 Million MYR in June 2002.

1.6 The stock of foreign reserves

In 1997-98: Foreign reserves can come from the annual trade surplus balance of

payments items such as tourism and incomes from abroad, and the inflow of foreign funds

either long term or short term. The equity market is where a very substantial amount of the

nations capital resources are being invested. In 2010, total market capitalization of Bursa

Malaysia stood at more than RM2 trillion. The values of the shares in the stock exchange are

very much linked to the value of the currency. Like the currency commodity, the shares

commodity is sensitive and volatile to changes to general economic, global and financial

market fundamentals.

Before 1997: The exchange rate policy had pegged to the dollar. Although these

smaller East Asian countries used a variety of exchange rate systems, their common peg to

the dollar provided an informal common monetary standard that enhances macroeconomic

stability in the region. The debtor countries Indonesia, Korea, Malaysia, Philippines and

Thailand were forced to float, let their currencies fall precipitately when they were attacked.

A floating exchange rate is determined by the market force through supply and demand.

After 1998: Malaysia exchange rate was fixed. Under the fixed exchange rate policy,

Malaysia was able to sustain and attract inward foreign investment due to the lower costs of

production compared to others affected countries. Due to this, the policy helped do much to

ensure Malaysia competitiveness is lasting even under the crisis pressures


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1.6 The way the current account deficit was financed and the size and composition of

external debt (bank versus non-bank borrowing, private versus public sector borrowing,

private versus public creditors of the country)

The Malaysian government has been struggling with its budget deficit for over a decade as it

has tried to balance its revenues and expenditures amidst a global rise in food and energy

prices. The Malaysian government has found it necessary to subsidize food and energy prices

to keep the poor off the streets. Increasing subsidy bill as the main cause of its perennial

budget deficit. The fiscal deficit which was about 5.5% of GDP in 2000 declined to 2.7% of

GDP in 2007 before it climbed very rapidly to 7% of GDP in 2009 due to rising fuel prices

and the consequent increase in subsidies and public expenditures. Despite government effortsto reduce subsidies, widen the tax base, increase revenues and reduce expenses the budget

deficit was about 5% in 2010. The budget deficit is projected to be about 5.6% of GDP in

2011.

The post-2009 government has tried both to bring down the rate of inflation and the budget

deficit and at the same time it has tried to reduce the ballooning subsidy bill. The subsidies

were given not only to ease the burden of the lower classes, but also to reduce possible class

tensions that may arise as a result of rising income inequalities. However, the budget deficit

has been persistent. It has remained around the 5.5% region. The government has argued that

the RM73 billion expenditure on subsidies a year is clearly unsustainable. These subsidies are

necessary to keep the prices of essential items stable. These essential items range from flour

to fuel.

The government has been considering the possibility of implementing a Goods and Services

Tax (GST) to increase revenues. The GST is a favorite among IMF economists and armchair

economists who argue that the GST will not hurt the poor because it is targeted at the middle,

upper and elite classes and the tourists. The government has, however, hesitated in

implementing the GST several times because of the lack of infrastructure to effectively

collect the taxes and also because it may be inflationary.

The government quite rightfully wants to contain the budget deficit because it does not want

to wake up to a Greek problem of an unsustainable budget deficit. It does not want to go into

debt although most of its borrowings are from the domestic capital market. However, in

going to the domestic capital market it may crowd out the private sector, on which it is

dependent to increase investments under Najibs New Economic Transformation Program.


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The traditional policy response to financial difficulties has been to seek assistance from the

IMF for improving the situation. For such assistance the countries in trouble invariably have

to undertake economic and financial reforms, impart more transparency to government

spending, and make the necessary macroeconomic adjustments. They must initiate measures

to revitalize their economic and monetary systems. Thailand and Indonesia took steps to

remedy their weaknesses. Korea too joined in. But these countries soon found the crisis

beyond their control, and decided to seek assistance from the IMF. Following the IMF

conditions for the help, these countries had to implement tight monetary and fiscal policies,

and had to enforce the prescribed structural reformations, particularly in the financial sector.

Malaysia did not approach the IMF but tried for

about a year the same measures as the institution prescribes. For example, for over a year it

followed a tight monetary policy through raising interest rates.

The real economy started shrinking. Many projects on the anvil had to be dropped, those in

progress were slowed down, and public expenditure was curtailed. Several allowances to

government employees were abolished or reduced, and many foreign workers had to leave.

But neither the

fiscal contraction, nor the tight money policy, the conventional tools, could ameliorate the

situation. Real GDP registered a fall of about 6% during the worst span of about a year, the

construction industry being among the worst sufferers. The country could still approach the

IMF for assistance. But such assistance never came without restrictions, and the experience

of the developing countries had seldom been encouraging. Restrictions abridged the

recipients freedom of action, at times their priorities clashed with the restructuring

requirements of the IMF. There often was also a mismatch between the repaying capacity of

the country and the repayment schedules. Since Malaysian economic fundamentals were not

weak, policy makers considered the

imposition of controls over capital outflows as a better alternative. It needed conviction in an

atmosphere loaded with the new urges for liberalization and openness. It was a decision to

swim against the current, and was quite risky.

On September 1, 1998 Bank Negara Malaysia announced controls on foreign capital flows to

curb the speculative demand for the ringgit, and prevent its internationalization. The

following day it pegged the local currency at RM 3.80 to a US dollar. The rate was 10%

higher than the level the ringgit had already depreciated to. The announcement thus

formalized the devaluation of the ringgit by 34%. However, Malaysian controls were quite


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selective, and were essentially designed to support the countrys recovery plan. They left

direct foreign investment untouched, and current account transactions remained fully

convertible. The details of the package are now available in the Bank Negara Report

1998.For example, banking institutions having the required capacity to lend were encouraged

to achieve a minimum loan growth target of 8% in due course of time, conditions for lending

to construction companies were eased, ceiling on loans for purchasing shares and units were

relaxed, financing margin for all passenger cars was raised, and minimum monthly repayment

on credit cards was reduced. Thus, avoiding the IMF assistance, and the accompanying tight

money policy, restructuring programs, austerity measures, and other conditions, Malaysia

chartered a new course to put the economy back on track.

Brazil Before and During crisis:

According to a report released by the Central Bank (BC), Brazils current account deficit

widened more than expected and foreign direct investment decreased in April as a weakening

global economy hit Brazilian exports and prompted companies to repatriate more profits

abroad.The current account deficit reached US$ 5.4 billion, the worst data since 1947, and

more than the US$4 billion estimated by the market. Along with a weak trade surplus (US$

882 million), the robust (and much more than expected) remittance of profits and dividends

(USD 2.4 billion) contributed to this significant deficit. Over 12 months, the current account

gap widened to USD 51.8 billion, or 2.05% of GDP (up from 1.99% in March).

In 1999: Fernando Henrique Cardosos victory in the Brazilian presidential election would

serve to inoculate Brazil from the devaluation virus. Cardoso, architect of Brazil's "Plan

Real," was to implement structural adjustments and economic reforms designed to satisfy the

conditions set by the International Monetary Fund (IMF) for a $41.5 billion loan. This $41.5

billion was deemed more than adequate to bolster Brazil's dollar reserves and protect the real

from speculative attack or capital flight, despite a rising current account deficit, budgetary

problems, and rising levels of dollar denominated debt in the Brazilian corporate sector.

But at the end of the day, Cardoso could not deliver. He was unable to get the IMF supported

budget (with tax increases and spending cuts) or the economic reforms (particularly

liberalization of the pension system) through the Brazilian legislature.The well heeled in Rio

and Sao Paolo became convinced that devaluation of the real was inevitable and began


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shifting their wealth out of Brazil and into bank and brokerage accounts in the U.S., Europe,

and off-shore havens. The more dollars fled Brazil, the more negative expectations about

Brazil's future, particularly the future value of the real. The more negative the expectations,

the more the capital flight.

In an effort to defend the real, the Brazilian Central Bank pushed up interest rates to nearly

50%. In fact, the high interest rates raised the cost of servicing debt, both public and private

debt, to levels that were so high that investors became even more certain that a major default

would occur, followed by a subsequent collapse in the dollar value of the real. The high

interest rates only speeded up the fall in asset prices in the Brazilian economy, reducing the

collateral backing existing loans, increasing the rate and risk of bankruptcies, and placing

extraordinary burdens on the entire financial system.

For whatever reason, President Cardoso and his advisers decided that the solution was a

devaluation. He had earlier pledged not to devalue. The devaluation threatens the financial

health of many Brazilian firms, particularly but not only those exposed to foreign exchange

risk. To make matters worse, credit agencies, who were criticized for being too slow to

reassess the Asian economies, are now downgrading Brazil's sovereign debt. This will further

raise borrowing costs and create even tighter credit conditions for the entire Brazilian

economy. The devaluation will raise the costs of imported inputs to industry, as well as

imported consumer goods.

These are the short-term solution to the Brazilian crisis. There are two distinct and opposed

possibilities and a wide range of possibilities in between. The Brazilian government could

either abandon any attempt to control the exchange rate and, therefore, stop frittering away

the Central Bank's dollar reserves trying to keep the real within its targeted trading band or

the government could simply fix the exchange rate in a manner that does not requiremanaging the real. This latter approach could be achieved by copying the Argentinean

currency board (or even joining that currency board). The currency board solves the most

difficult problem in a fixed exchange rate regime by controlling domestic monetary growth.

There is always, however, concern that a currency board would take away the flexibility of

the Central Bank to respond to economic crises and could lead to even worse economic

downturns than might occur under a freely floating currency.


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The Brazilian government has decided to float the real against the dollar. This will help to

solve one of the structural problems that was deemed a negative factor in Brazil's economy.

Dollar equivalent wages in Brazil will fall precipitously. For exporters, this will mean,

potentially, a big boost in profit rates.

Addendum (Jan. 18, 1999):

Brazil after crisis:

Characterized by large and well-developed agricultural, mining, manufacturing, and service

sectors, Brazil's economy outweighs that of all other South American countries, and Brazil is

expanding its presence in world markets. Since 2003, Brazil has steadily improved its

macroeconomic stability, building up foreign reserves, and reducing its debt profile byshifting its debt burden toward real denominated and domestically held instruments. In 2008,

Brazil became a net external creditor and two ratings agencies awarded investment grade

status to its debt. After strong growth in 2007 and 2008, the onset of the global financial

crisis hit Brazil in 2008. Brazil experienced two quarters of recession, as global demand for

Brazil's commodity-based exports dwindled and external credit dried up. However, Brazil

was one of the first emerging markets to begin a recovery. In 2010, consumer and investor

confidence revived and GDP growth reached 7.5%, the highest growth rate in the past 25

years. Rising inflation led the authorities to take measures to cool the economy; these actions

and the deteriorating international economic situation slowed growth to 2.7% for 2011 as a

whole, though forecasts for 2012 growth are somewhat higher. Despite slower growth in

2011, Brazil overtook the United Kingdom as the world's seventh largest economy in terms

of GDP. Urban unemployment is at the historic low of 4.7% (December 2011), and Brazil's

traditionally high level of income equality has declined for each of the last 12 years. Brazil's

high interest rates make it an attractive destination for foreign investors. Large capital inflows

over the past several years have contributed to the appreciation of the currency, hurting the

competitiveness of Brazilian manufacturing and leading the government to intervene in

foreign exchanges markets and raise taxes on some foreign capital inflows. President Dilma

ROUSSEFF has retained the previous administration's commitment to inflation targeting by

the central bank, a floating exchange rate, and fiscal restraint.

ref: Index Mundi


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Conclusion: Based on information given above, Id agree on investing in Malaysia country

since the government financed the country deficit rather excellently. There is pros and cons

when Dato Mahathir Mohamed didnt take up IMF for Malaysia, its good that Malaysia does

not need IMF to resolve Malaysia financial crisis problems. It made the country more safer

because Malaysia become less exposed to foreign influences in economic segments. Brazil on

the other hand, does not seems reliable to invest in, because based on economic indicator

stated above the economy of Brazil is less stable compared to Malaysias. Besides it had not

only reinforced the negative expectations in the financial markets and community of the

Brazilian well-to-do, but destroyed one of the most precious non-physical assets that any

government can have, credibility. the Brazilian economy is more exposed to foreign

influences. Negative sentiments in global financial markets can more efficiently and quickly

be transmitted into the Brazilian economy via a falling value of the real vis-a-vis dollars. This

means that any drastic actions by Brazilian governors, such as debt moratoria, or continued

intransigence by the Brazilian legislature would have rather immediate negative

consequences for Brazilian workers and consumers.

Brazil under IMF, thus exposed to foreign threats, Malaysia no IMF thus more stable not

exposed to forgein economic company make comparison with Malaysia. In conclusion, it is

better to invest in Malaysia.


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1.8 FISCAL POLICY

Fiscal policy is the use of government spending and taxation to influence the

economy. These policies affect tax rates, interest rates and government spending, in an effort

to control the economy. When the government decides on the goods and services itpurchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal

policy.

Fiscal policy in Malaysia

Before 1997:The Malaysian government played a key role in the economy.

Government participation in the economy expanded further in 1980-82 as it pursued an

expansionary countercyclical fiscal policy aimed at stimulating economic activity and

sustaining growth to ride out the effects of the global recession. The countercyclical policy

led to twin deficits in the governments fiscal position and the balance of payments.

After 1998: Malaysia keeps all policies under constant review, to respond to

changing circumstances. During 1998-2002 monetary conditions also supported the

expansion of private sector activities. Interest rates were cut to historically low levels in 1999,

with the intervention rate reduced .In pursuing expansionary demand management policies,

care was taken that fiscal and monetary measures would not unduly risk creating imbalances

which might jeopardise the long-term growth potential, price stability or gains made in

achieving a robust balance of payments.

Fiscal policy in 2012:Is geared towards stimulating domestic economic activity and

providing support to the economic transformation plan. A key challenge for the Government

in 2012 is to continue providing support to domestic demand amid the weakening external

sector while ensuring that the fiscal position remains sustainable. In this regard, greater

emphasis has been placed in the 2012 Budget on generating growth through private sector

investment and consumption. The Federal Government fiscal deficit is expected to narrow

further from 5.0% in 2011 to 4.7% of GDP in 2012. Revenue collection is expected to

improve to RM186.9 billion, supported by better tax administration and higher compliance in

tax submission and collection.


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Fiscal policy in Brazil

Before 1997:Inflation and monetary correction have practically disappeared in

Brazil , the country continues to use a strange concept to measure the behavior of fiscal

policy , the primary surplus. This is the difference between government revenues and

government expenses without including one major expense which is nominal interest

payments. As far as we know, Brazil is the only country that emphasizes this primary

surplus, as opposed to the more normal concept of government deficit in nominal terms,

including all revenues and expenses.

After 1998:Both government revenues and current government expenditures are

growing much faster than GDP, while public investments are being restricted and nominal

interest payments are becoming less important in the government budget . In other words, for

a given level of primary surplus, the government deficit is in fact increasing dramatically.

Worse, the growth of the deficit is being accompanied by a huge growth of the size of

government revenues and expenditures.Fiscal policy is becoming a mess, a growing public

deficit, a growing tax burden and a low level of public investments.The right thing to do

would be to diminish the public deficit, with more investments and less taxes.

Recently: Brazil plans to rely more on interest-rate cuts than fiscal stimulus to ensure

economic growth quickens to an annual pace of 5 percent by the end of 2012. Tax cuts on

consumer loans, home appliances and food staples announced December, were narrowly

focused to help companies and retailers reduce inventories and pose no threat to the

governments fiscal target in 2012 . The steps taken, including targeted tax breaks for

industry earlier this year, should be enough for Latin Americas biggest economy to regain its

footing and grow at least 4 percent in 2012.

Conclusion:As a conclusion ,in Malaysia a strong commitment to fiscal sustainability is

critical for macroeconomic stability as well as to ensure sustainable long-term growth.

Malaysia continues to enjoy flexibility in expanding its fiscal position, which remains

sustainable given the governments fiscal prudence and discipline compare to Brazil. For

Brazil a strange concept have been used to measure the behavior of fiscal policy, primary

surplus. As far as we know, Brazil is the only country that emphasizes this primary

surplus, as opposed to the more normal concept of government deficit in nominal terms,


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including all revenues and expenses Brazil should abandon as soon as possible this emphasis

on primary government surpluses. It is meaningless.

1.9 MONETARY POLICY

Monetary policy is the actions of a central bank, currency board or other

regulatory committee that determine the size and rate of growth of the money supply, which

in turn affects interest rates. Monetary policy is maintained through actions such as increasing

the interest rate, or changing the amount of money banks need to keep in the vault (bank

reserves).

Monetary policy in Malaysia

Before 1997: The monetary policy strategy had been based on targeting monetary

aggregates. This was an internal strategy and was not formally announced to the public. The

deployment of this strategy was based on evidence that the monetary aggregates were closely

linked to the ultimate objectives of monetary policy. In a correlation test conducted using

quarterly data from 1980 to 1992, monetary growth (M3) was shown to be positively and

highly correlated with inflation. Given that price stability was the ultimate objective of

monetary policy, monetary targeting was seen as a suitable target for policy. During this

period, the central bank, Bank Negara Malaysia (BNM) influenced the day-to-day volume of

liquidity in the money market, consistent with the monetary growth target.

After 1998: The policy response to the Asian crisis , the ability of BNM to influence

domestic interest rates based on domestic considerations had been affected by the volatile

short-term capital flows and the excessive volatility of the ringgit during the Asian financial

crisis. In 1998, given the risk of large capital outflows due to higher interest rates offered in

the offshore market to attract ringgit funds for speculation on the ringgit, BNM was not ableto lower interest rates to contain a further contraction in the economy.

Recently: Monetary policy in 2012 will continue to operate in a complex global

environment characterised by slower growth, rising uncertainties and increased volatility in

the financial and commodities markets amid high liquidity in the international monetary

system. The Malaysian economy entered 2012 with increasing downside risks to growth amid

softening inflationary pressures domestically. Monetary policy in 2012 will focus on ensuring

the sustainability of economic growth in an environment of price stability.


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Monetary policy in Brazil

Before 1997:Rampant inflation became the most harmful problem of Brazil's

economy The Plano Real ("Real Plan"), instituted in the spring 1994, sought to break

inflationary expectations by pegging the real to the U.S. dollar. Inflation was brought down to

single digit annual figures, but not fast enough to avoid substantial real exchange rate

appreciation during the transition phase of the Plano Real. This appreciation meant that

Brazilian goods were now more expensive relative to goods from other countries, which

contributed to large current account deficits.

After 1998: Monetary policy in Brazil after price stabilisation was characterised by

an excessive tightness. For several years real deposit interest rates were often higher than

20% and, in the most critical moments, even reached figures above the 40% level. The

financial and macroeconomic imbalances produced by those towering rates undermined

Brazilian stability, leading to the currency crisis that occur after 1998 which is on January

1999.

Recently: Brazil have financial system which rivals that of most developed

countries. Where others may have chosen to either anchor the price levels by returning to a

fixed or administeredexchange rate regime or to try and control a monetary aggregate,such as money held by the public or credit in the economy; Brazil has opted to use interest

rates as an instrument to control inflation.

Conclusion: As a conclusion, for Malaysia, a key precondition for monetary policy to

remain effective, in any exchange rate regime, is establishing a track record of credibility. In

Malaysia, this credibility is being achieved by adopting a holistic approach to policy

formulation. Rather than overburdening one policy tool, policymakers have used a

combination of several instruments for more effective results. For Brazil the very high

interest rates in Brazil up to its currency crisis were due to theoverreaction of monetary

policy to external shocks. This vulnerability was demonstrated in the sharp response to the

contagion from crises elsewhere, as well as to movements in the country risk premium. This

overreaction was associated with the presence of a large currency risk premium towards the

end of the soft peg regime. Malaysia has more advantage compare to Brazil.


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2.0 The behaviour of the banking system and financial intermediaries including the fragility

of the banking system, evidence on the growth rate of lending, the external borrowing

behaviour of the banks and the amount of non-performing loans.

Malaysia

Before 1997:Loan growth in banking sectors broad property sector averaged about 44% per

annum compared to about 22% in the manufacturing sector. loan growth for the purchase of

shares and for consumption credits in the total banking system averaged about 11.5% and

13% respectively in the same period property sector was lending to the broad property sector

was a more lucrative business than lending to the manufacturing sector.

After 1998: Only in Malaysia, total asset affects significantly negative to debt ratio and bank

borrowing ratio Banking sector has preserved the distance from the manufacturing sectors in

FDI led industrialization. No significant difference on the foreign firms from the average.

Financial intermediation to foreign firms has been deepened in the process of reorganization

of the financial sector in the last decade

Recently:On the demand side, this was due to slower growth of public consumption and net

exports. The former grew just 5.9 per cent year-on-year, considerably down from the levels

achieved in the last two quarters of 2011 (4Q11: 22.9%; 3Q: 21.1%). The latter, against a

backdrop of poor external demand due to slow global economic growth, fell 20.8 per cent

year-on-year. Latest data for June meanwhile show that the annual import growth of 6.3 per

cent in China, a major destination for Malaysian exports, is just half of the 12.7 per cent

achieved in May. .

Brazil

Before 1997:The Real Plan was conceived on the same basis as the stabilization programs

with exchange anchor implement edin Latin America since the late 1980s, using a fixed or

semi-fixed rate of exchange in combination with more open trade policy as a price anchor. It

differed from Argentinas Convertibility Plan by adopting a more flexible exchang eanchor;

that is, a typical currency board system, rather than pegging the domestic currency at one-to-

one parity with the U.S. dollar. At the launch of the Brazilian program, in July 1994, the


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government's commitment was to maintain exchange rate ceiling of one-to-one parity with

the dollar. Moreover, the relationship between changes in monetary base and foreign reserve

movements was not explicitly stated, allowing some discretionary leeway. After the effects of

the Mexican crisis, the exchange rate policy was reviewed and in a context of a crawling

exchange rate

After 1998: Brazilian economy has been marked by a stop-go trend. Highbanking spreads

and low credit-to-GDP ratios have contributed to economic growth below the economys

potential. The switch from an exchange anchor regime to a floating exchange regiment

January 1999, which marked the end of the Real Plan, was expected to reduce external

vulnerability and bring down interest rates, thus enabling the economy to overcome

macroeconomic constraints and move towards more sustainable growth. Such, however, has

not been the case, since there are still some severe macroeconomic constraints hindering

economic recovery.

Recently:The focus on financial sector reform in emerging market economies often centers

on the need to reduce government involvement in markets. Individual countries have taken

many different approaches toward reaching this goal. In Brazil, financial sector reform has

entailed the need for a large governmental role in structuring reforms, especially in the

banking sector.

Conclusion: As a conclusion compare Malaysia and brazil because Malaysia has consistence

economy than brazil that why Malaysia can solve the asia crisis with easy. Furthermore,

This vulnerability was demonstrated in the sharp response to the contagion from crises

elsewhere, as well as to movements in the country risk premium.This overreaction was

associated with the presence of a large currency risk premium towards the end of the soft peg

regime. Malaysia has more advantage compare to Brazil.


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2.1 The financial conditions of the corporate sector including evidence of excessive

borrowing and leverage (all in this) over investment in the wrong sectors and projects, low

profitability of investment.

MALAYSIA:

Bank Bumiputra was incorporated in 1965 and was supposed to provide credit and financial

facilities to the rural areas in Malaysia. As a government-owned bank it is the preferred bank

for deposits of state funds and it grew rapidly and became the largest bank in SE Asia.

However, usually UMNO politicians or UMNO-linked civil servants were appointed to run

the bank instead of independent professional managers.

It is not surprising that it became a source of cheap funds and questionable loans for well-

connected businesses. This includes a RM200 million loan to UMNO in 1983 to build its

headquarters.

In July of 1983, what was then the biggest banking scandal in world history erupted in Hong

Kong, when it was discovered that Bumiputra Malaysia Finance (BMF), a unit of Bank

Bumiputra Malaysia Bhd, had lost as much as US$1 billion which had been siphoned off by

prominent public figures into private bank accounts. The story involved murder, suicide and

the involvement of officials at the very top of the Malaysian government. Ultimately it

involved a bailout by the Malaysian government amounting to hundreds of millions of

dollars.

That was just the first Bank Bumi scandal. The government-owned bank had to be rescued

twice more with additional losses of nearly US$600 million in todays dollars. Ultimately

government officials gave up and the bank was absorbed into CIMB Group, currently headed

by Nazir Razak, the prime ministers brother.

(ref.Grand Theft Malaysia, Asia Sentinel)

Based on the wrong investment that was made in Bumiputera Bank in 1965 its becoming in

evidence that Malaysia is not making a sound investment:

1) the banking system was being leaded by political person, not by professionals
http://www.asiasentinel.com/index.php?option=com_content&task=view&id=2165&Itemid=199http://www.asiasentinel.com/index.php?option=com_content&task=view&id=2165&Itemid=199http://www.asiasentinel.com/index.php?option=com_content&task=view&id=2165&Itemid=199http://www.asiasentinel.com/index.php?option=com_content&task=view&id=2165&Itemid=199


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2)the investment was not made based on professional evaluation and the way they solve the

problems by using another corporate body to bail out the deficit that they have which the

money can be used to generate other income for the economy if Malaysia.

This also has resulted to the bank excessive borrowing from another corporate body, butmaking really low profit from its investment.

Brazil:

The sweetheart of many international investment portfolios in recent years, the Brazilian

economy had been enjoying a spectacular boom. Fortunes were made on the mushrooming

property market. Consumption had soared, with Brazils new middle class maxing out their

credit cards at mallsjust because they could. Business was going swimmingly for Brazil

until it started to flounder in the second half of last year. As the euro zone crisis deepened,

Brazils economy stumbled. It had cruised along at a 7.5 percent growth rate in 2010. By the

end of last year, some analysts revised growth predictions in 2012 to 3 percent, paltry by

recent Brazilian standards.

The truth was even worse than it might have seemed, according to data released in February

by IBGE, Brazils official statistics bureau. Gross domestic product (GDP) in 2011 grew by

just 2.7 percentthe second-slowest pace since 2003and Brazil skidded dangerously

close to a recession. Brazils economic growth slowdown was largely cyclical in nature, and

coming off the back of such strong growth in 2010, it is not particularly surprising.

Brazilsboom was built on the twin engines of commodities and consumption.

Brazil exports minerals (such as tantalum, used in cell phones) and raw materials (such as

coffee and sugar) to countries including China. Abroad, factories turn these exports into

finished products, to be sold on to consumers in Europe, the US and the rest of the world.

When North America sputtered and the euro zone crisis took a turn for the worse mid-way

through last year, shoppers worldwide started tightening their belts. Back on the supply end,

demand for Brazils exports began to dry up, causing industry to slump. More significantly,

around the same time Brazilians began to feel the effects of interest rate hikes, put into effect

in the first half of last year. Making credit more expensive had been a deliberate, slow-burn

attempt to cool inflation by reducing private spending.

With Brazilians already nervous about the global uncertainty, the governments plan worked.

Consumptionwhich had been the primary engine of growth in recent yearsstalled.Starting in October last year, the Brazilian Central Bank responded to the slowdown by


22/25

lowering its basic interest rate, to make credit cheaper and ramp up private spending again.

Target interest rates were slashed from highs of 12.5 percent through August last year, to just

9.75 percent as of last week.

The bank is also trying to stimulate lending through so-called macro prudential measures:

The Finance Ministry has also reduced taxes in certain sectors, and plans to spend less on

wages and more on investmenta mix it hopes will be more pro-growth and less

inflationary.

Now the government and economists are more upbeat about Brazils 2012 growth prospects

than they were late last year. BMI forecasts real 2012 GDP growth of 3.9 percent, and the

government is shooting for closer to 5 percent. However, many analysts reckon Brazil will

only see the benefits of its latest stimulus measures in the second half of the year.

Brazilian consumers are some of the most highly leveraged in the world, and that by

increasing the propensity to consume rather than save, the authorities are incentivizing

households to take on even more debt.

Although Brazils currency, the real, has dropped in value compared to its peak of around

1.55 in July last year, it has remained comparatively strong at 1.82 to the US dollar. Thats

causing Brazils export competitiveness to suffer and making life hard for manufacturers.In

short, he says, Brazil is consuming a lot more than it is producing, and at some point this

has to endor at least slow downalthough how and when this will play out is hard to

call.

ref:http://www.voxxi.com/the-brazilian-economy-what-went-wrong-

americas/#ixzz25Syp9PHT

Based on the information given above, it is clear that Brazil is having financial issue in its

economic due to its downturn in supplying goods. While North America demanding lesser

goods from Brazil, its has resulted Brazil earning lesser profit in its investments. Making

Brazil currency dropped its value and resulted in Brazil economic slowdown.
http://www.voxxi.com/the-brazilian-economy-what-went-wrong-americas/#ixzz25Syp9PHThttp://www.voxxi.com/the-brazilian-economy-what-went-wrong-americas/#ixzz25Syp9PHThttp://www.voxxi.com/the-brazilian-economy-what-went-wrong-americas/#ixzz25Syp9PHThttp://www.voxxi.com/the-brazilian-economy-what-went-wrong-americas/#ixzz25Syp9PHThttp://www.voxxi.com/the-brazilian-economy-what-went-wrong-americas/#ixzz25Syp9PHThttp://www.voxxi.com/the-brazilian-economy-what-went-wrong-americas/#ixzz25Syp9PHT


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2.1 Political factors of Malaysia

In 1997-98economic crisis was portrayed as a personal victory because Mahathirs policy of

economic control, imposed in September 1998, protected Malaysia from the whims of outside

investors. By bringing an end to capital flight, capital control allowed the government to

lower interest rates and pump cash into the economy. And the governments attempt to

encourages financial to continue lending to companies, many of them politically connected,

has been a success in the short term.

Before 1997: The thailand crisis, analysts were speaking approvingly of a soft-landing, as

the economy to gradually slow in comparison with the torrid pace of 1995 and 1996.

Following the attacks on the Thai bath in may, central bank briefly defended the ringgit but

quickly gave up the effort. For the remainder of the year, the ringgit continued steady, and

largely uninterrupted fall.

After 1998Malaysias recovery in 1999-2000 was among the strongest of the Asian crisis

economics, led by buoyant world demand for electronic and supported by accommodating

macroeconomic policies. The external current account turned into large surpluses, allowing a

build up of international reserved. Unemployment declined, and inflation remain low. The

strong growth and a gradual easing of capital control helped investor confidence. Therecovery was also accompanied by reduced vulnerability of the financial system. Although

operational restructuring of the corporate sector has been somewhat slow, much progress was

achieved with corporate debt restructuring.


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Political factors of Brazil

After 1997 based on forward In the bond market, Favero and Giavazzi offer evidence for the

role of political factors in explaining Brazilian interest rates. They note that the upward shift

in the term structure of forward rates that occurred between February 2002 and may 2002

could be linked to electoral uncertainty, and that forward-looking data as of mid 2002

indicated another upward shift in spring 2003,when the new government was to take office

after the election.

Before 1998 Brazil signed up to the "consensus" later than most, though there was a botched

attempt in 1990 by President Collor to halt inflation by freezing bank accounts. Collor, whowas later forced out of office on corruption charges, also scaled down the tariffs surrounding

the economy and attempted to cut public spending. In 1994, Fernando Henrique Cardoso, the

Brazilian Social Democratic Party (PSDB) economy minister in the next administration,

introduced the Plano Real, with full backing from the international financial world. It stopped

hyper-inflation by anchoring the currency to the dollar and by keeping interest rates high and

the exchange rate overvalued. The "inflation tax" was lifted from the shoulders of lower-

income families, generating a one-off but significant increase in living standards and aconsumer boom. This success ensured Cardoso's election to the Presidency in October 1994,

in alliance with the conservative Liberal Front Party (PFL).

Recently, The Brazilian Federation is the "indissoluble union" of three distinct political

entities: the States, the Municipalities and the Federal District.[14]The Union, the states and

the Federal District, and the municipalities, are the "spheres of government." The Federation

is set on five fundamental principles:[14]sovereignty,citizenship,dignityof human beings,

the social values of labour and freedom of enterprise, andpolitical pluralism.The classic

tripartite branches of government (executive,legislative,andjudicialunder thechecks and

balancessystem), is formally established by the Constitution. The executive and legislative

are organized independently in all three spheres of government, while the judiciary is

organized only at the federal and state/Federal District spheres.
http://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13http://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13http://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13http://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13http://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13http://en.wikipedia.org/wiki/Sovereigntyhttp://en.wikipedia.org/wiki/Sovereigntyhttp://en.wikipedia.org/wiki/Sovereigntyhttp://en.wikipedia.org/wiki/Citizenshiphttp://en.wikipedia.org/wiki/Citizenshiphttp://en.wikipedia.org/wiki/Citizenshiphttp://en.wikipedia.org/wiki/Dignityhttp://en.wikipedia.org/wiki/Dignityhttp://en.wikipedia.org/wiki/Dignityhttp://en.wikipedia.org/wiki/Pluralism_%28political_philosophy%29http://en.wikipedia.org/wiki/Pluralism_%28political_philosophy%29http://en.wikipedia.org/wiki/Pluralism_%28political_philosophy%29http://en.wikipedia.org/wiki/Executive_%28government%29http://en.wikipedia.org/wiki/Executive_%28government%29http://en.wikipedia.org/wiki/Executive_%28government%29http://en.wikipedia.org/wiki/Legislaturehttp://en.wikipedia.org/wiki/Legislaturehttp://en.wikipedia.org/wiki/Legislaturehttp://en.wikipedia.org/wiki/Judiciaryhttp://en.wikipedia.org/wiki/Judiciaryhttp://en.wikipedia.org/wiki/Judiciaryhttp://en.wikipedia.org/wiki/Separation_of_powershttp://en.wikipedia.org/wiki/Separation_of_powershttp://en.wikipedia.org/wiki/Separation_of_powershttp://en.wikipedia.org/wiki/Separation_of_powershttp://en.wikipedia.org/wiki/Separation_of_powershttp://en.wikipedia.org/wiki/Separation_of_powershttp://en.wikipedia.org/wiki/Judiciaryhttp://en.wikipedia.org/wiki/Legislaturehttp://en.wikipedia.org/wiki/Executive_%28government%29http://en.wikipedia.org/wiki/Pluralism_%28political_philosophy%29http://en.wikipedia.org/wiki/Dignityhttp://en.wikipedia.org/wiki/Citizenshiphttp://en.wikipedia.org/wiki/Sovereigntyhttp://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13http://en.wikipedia.org/wiki/Brazil#cite_note-Constitui.C3.A7.C3.A3o-13


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Conclusion: As a conclusion Malaysia has a advantage then brazil because Malaysia crisis

not so bad than brazil. . For Brazil the very high interest rates in Brazil up to its currency

crisis were due to theoverreaction of monetary policy to external shocks. . This vulnerability

was demonstrated in the sharp response to the contagion from crises elsewhere, as well as to

movements in the country risk premium.This overreaction was associated with the presence

of a large currency risk premium towards the end of the soft peg regime. Malaysia has more

advantage compare to Brazil.

\

macro done

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