rafael nadal (pdf)

CURRENT GLOBAL FINANCIAL CRISIS AND

ITS IMPLICATIONS ON INTERNATIONAL

FINANCIAL INSTITUTIONS: THE CASE OF

MALAYSIA

Table of Contents Number of Pages

1.0 Introduction 1

2.0 Objectives of the study 3

3.0 Scope of study 3

4.0 Literature Review 4

5.0 Discussion and findings

5.1 Impacts on Malaysia 7

5.2 Steps taken by Malaysia 12

5.3 Effectiveness of steps 18

6.0 Limitations 22

7.0 Conclusion 22

References 23

Abstract

The purpose of this paper is to examine the impacts of current global financial crisis on international

financial institutions. However, the primary focus of this paper is limited, as more emphasis is put to

determine the effects of the crisis in the case of Malaysia. This study contributes to the knowledge of

Malaysian citizens and also investors to be well aware of the risks attached with investments in this

country. In addition, this paper also provides some level of exposure to Malaysian citizens about the

condition of our country particularly after being hit by the global financial crisis in the last few years.

Most of us think that the global financial crisis which occurred in 2007 was only caused by the subprime

mortgage. The truth is that there are a number of other factors which contribute to the crisis. The global

financial crisis gives several impacts to international financial institutions (IFI) and also to other

countries including Malaysia. In order to overcome this crisis, Malaysia has taken various steps. This

paper also aims to show how far is the effectiveness of the steps taken through the stability of Malaysia

economy.

1

1.0 Introduction

According to business dictionary, global can be defined as planetary, world, worldwide which involves

the entire earth, not limited or provincial in scope. The term financial crisis is applied broadly to a variety

of situations in which some financial institutions or assets suddenly lose a large part of their value

(Investopedia, 2010). On the other hand, international financial institutions can be defined as public

banks and other credit institutions “owned” by more than one country which provides developmental

financing to borrowing governments in the Global South and private companies from the Global North

or South operating in those countries.

Several years ago, Malaysia was shocked by the crisis leading to the decline of the national

currency, where the national currency’s value stood at a very low level compared to previous years.

This crisis, which is widely known as the global financial crisis occurred in the year 2007. Even after five

years post-crisis, the after-effects resulting from the global financial crisis can still be felt until today;

with its epicenter in the United States (U.S.), whose economic situation after the crisis had severely

affected the Malaysian economy. In this context, two researchers, Mckibbin and Stoeckel (2009)

defined the term “crisis” as the bursting of the housing market bubble in the late of 2007, which resulted

in the collapse of the sub-prime mortgage market and related financial markets, and subsequently, the

collapse of the Lehman Brothers in 2008, which ultimately induced a sharp increase in risk premier all

over the world. From a housing crisis, it quickly grew into a banking crisis with investments and

merchant banks absorbing the initial impact before spreading further to the commercial banks.

Most people tend to blame the subprime mortgage as the one and only cause of the global

financial crisis. However, the truth is that the global financial crisis was not caused by one, single event.

Instead there are a number of other factors, which when put together, forms the underlying reasons that

have caused the global financial crisis. These reasons include overzealous or free market ideology,

financial innovations, faulty policies, preserve incentives, as well as outright deceptions, all of which are

interconnected with each other.

The global financial crisis began in the mid of 2007, starting with the credit crunch that resulted

in liquidity crisis in the U.S., following the loss of confidence of sub-prime mortgage investors towards

the sub-prime mortgage value. As the result, the Federal Bank of U.S. injected a large amount of

capital into the financial market. The crisis however, only turned for the worse as stock market all

around the world crashed, at the same time becoming highly volatile (Cannex, 2009). Other factors that

contributed to the global financial crisis are the sub-prime crisis and the housing bubble, where the

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latter have made homeowners become aware of the reality that they are unable to make payment for

their mortgages. In effect, the housing market in the U.S. suffered greatly, ultimately resulting in

numerous cases of evictions, foreclosures and prolonged vacancies. In addition, the effect of declining

home prices has turned the equity value of many borrowers to become negative as most borrowers

went default on their loans. Thus, banks were forced to take over the house and land in lieu of loan

borrowers who were incapable of repaying their loans. However, banks face large losses following their

takeover of homes at values much lower than at the original issuance. As a result from the fallout of

sub-prime lending bubble burst, banks suffered liquidity crisis, which led to a situation where getting

credit was tough and difficult. This situation is commonly referred to as the credit crunch (Cannex,

2009).

The crisis that occurred in the U.S. spread to Malaysia through two way-trade and financial

channels. According to Tan Sri Nor Mohamed Yakcop; “In 2008, the US capital flows to developing

countries totaled US $ 466 billion (RM1.7 trillion), compared to US $ 929 billion (RM3.5 trillion) in 2007.

However, for 2009, total net capital flows is expected to be US $ 165 billion (RM623 billion), a large

reduction. Malaysia is involved because the country depends on foreign direct investment (FDI). Global

bond markets also performed badly. In the second quarter of 2008, the global bond market is estimated

to be U.S. $ 50 billion; however it fell drastically and only amounted to U.S. $ 5 billion in the fourth

quarter of 2008”. The spread of the crisis in Malaysia in terms of trade occurs when global demand fell

in the fourth quarter of 2008. This situation affected Malaysia as one of the country’s exporters. Being

an integrated commercial operation, a sudden decline in Malaysia's exports will be greatly missed. In

addition, the value of goods exported by Malaysia decrease sharply as oil prices more than double than

previously while palm oil is down sharply over the forecast (Utusan Malaysia, 2009). Although more

than one financial crisis has happened in the past, economists have yet to learn a lesson from them,

thus we can only live happily for a while - but not for ever after (Malik, Ullah, Azam, & Khan, 2009).

As a consequence from the global financial crisis, international financial institutions and

Malaysia have each experienced a number of impacts. In the case of Malaysia specifically, the global

financial crisis has cast doubts on the capability or the efficiency of Malaysia’s government plans

towards realizing Vision 2020 following the collapse in Malaysia’s exports as well as the slowdown in

foreign direct investment (FDI) (Abidin & Rasiah, 2009). This paper is structured as follows: section 2

discusses literature review, section 3 outlines discussion and finding, and section 4 discusses

conclusion and limitations of study.

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2.0 Objectives of the Study

1) To determine the impact of global financial crisis in Malaysia

2) To examine the steps taken by Malaysia in order to overcome the global financial crisis

3) To determine the effectiveness of the steps that has been taken by Malaysia

3.0 Scope of Study

The purpose of the study is to investigate the current global financial crisis and its implications on

international financial institutions. However, we will focus more on the case in Malaysia. Here, we want

to see the effects of global financial crisis on Malaysia, steps that has been taken by Malaysia in order

to overcome the crisis as well as the effectiveness of those steps. The reason why we have chosen

Malaysia as our scope of study is because we want to know in more detail about the condition of our

country so that as Malaysian citizens we can be better prepared for the future should another financial

crisis occurs again.

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4.0 Literature review

The “crisis” is defined as the bursting of the housing market bubble in the late of 2007, the consequent

collapse in the subprime mortgage market and related financial markets and the subsequent collapse of

Lehman Brothers in year 2008, which resulted in a sharp increase in risk premier around the world

(Prema, 2010). This crisis came as surprise to many people, but not for others. Several major financial

institutions taken over by other financial institutions have either received government bailout or went

completely bankrupt in the last few months. Some of the biggest and most venerable banks, investment

houses, and insurance companies have either announced bankruptcy or have had to be rescued finally

(Nanto, 2009).

The global financial crisis ignited by the supreme credit crisis in the US, the world's largest

economic center and home to the dominant key global dollar and the most sophisticated and advanced

world financial system have caused the financial markets of the developed world to become unstable.

Subsequently, the prominent names in the banking industry collapsed, causing a large decrease in the

stock market about 40 percent from their recent high besides causing investment banks to collapse

(Velde, 2008). Dr. Thomas G. Aquino (2009) stated that since the Great Depression of the 1930's, the

current sub-prime crisis that has now grown into a massive global financial and economic crisis, to be

the worst crisis. Over the past few decades, this crisis is clearly different from other financial crises that

we have observed not only in width and magnitude, but also in origin. As a result of this global crisis, it

affected almost all countries in the world, not just a few, at the same time leaving an enormous impact.

Besides that, this financial crisis also has been rushed across the public private boundary,

which has hit the private firms and the financial statements has forced the new heavy demands on the

public sector’s finances. The crisis has surged across national borders within the developed world. The

financial crisis have also affected banks in the developing economies, as these banks too, have to

suffer contractions in credit lines and reduced financial flows. Due to the failure of leading financial

institutions such as IMF, IMF failed to respond to the Asian crisis during the second great recession.

IMF failed to predict the coming banking crisis due to the currency crisis (Malik, Ullah, Azam, & Khan,

2009).

In addition, in September 2008 the collapse of Lehman Brothers, which included global liquidity

squeeze, has affected Malaysia. US dollar funding pressures have caused rapid spread of wider cross

currency basis swap and sporadic evidence of difficulties in accessing credit. In mid-2008 and March

2009, the benchmark equity index has dropped about 30 percent. Portfolio outflows of around US $ 27

5

billion in 2008, and bank outflows surged in the second half of 2008, albeit at a smaller scale compared

to some other countries rely more on wholesale cross-border financing (Alp, Elekdag & Lall, 2012). The

collapse of Bear Stearns29, mortgage brokers, who were rescued by the government by JP Morgan

Chase and the Fed, signaled that other financial institutions can also be in dire straits and that systemic

risk is now a clear and present danger. By early April 2008 more financial institutions, such as UBS and

Citigroup, have announced huge losses.

After the implosion of the subprime mortgage crisis in year 2007, five of America’s largest

investment banks have been reborn as commercial banks. The reality in the financial markets brought

to light not only the weaknesses in cross-border banking but also the seriously wounded faith of many

academicians, economists, and governments in the financial globalization and capitalism. The collapse

of the banking system in Iceland, the fall of Fortis which a Belgo-Dutch Bank, and Lehman Brothers all

can be explained by the intricate and complex web that ties the fates of multiple countries together of

that with the economy and financial markets of the US. Amidst the financial turmoil and partial

nationalization of financial firms, Malaysia’s financial system appears to be resilient. However, as the

world heads towards a global recession, Malaysia would not be left off the hook. The implications of the

US financial crisis on the Malaysian economy gives the big impact on the Malaysian banking and

finance industry and structure. Based on the secondary data obtained from the IMF in October, the

economic variables might have changed since then as the macroeconomic variables in many countries

have taken a turn, some for the better and some for the worse. This implies that the huge liquidity

supplies by central banks of developed nations are used to strengthen capital positions of financial

institutions instead of rechanneling these funds into the economy. This is a great source of concern as

it implies that the real economy of the US would be slowing down dramatically as financial institutions

accept tighter credit lending policies in an effort to recapitalize. Many countries in Asia are adversely

affected by the US financial crisis. The newly industrialized Asian economies are heavily affected by the

US mainly because the advanced economies remain their biggest trading partners (Mindstorm, 2009).

The 3 main shocks capture the onset of the global financial crisis: (1) The bursting of the

housing bubbles causing a reallocation of capital and a loss of household wealth and drop in

consumption; (2) Sharp rise in the equity risk premium which means the risk premium of equities over

bonds causes the cost of capital to rise, private investments to fall and demand for durable goods to

collapse; and (3) A reappraisal of risk by households causing them to discount their future labor income

and increase savings and decrease consumption (Mckibbin & Stoeckel, 2009).

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The global financial crisis has hit Malaysia, but with a slightly way from the AFC. Shock in this

crisis is sent by the financial sector and trade (Sheng, 2010). However the drop to the other parts of the

financial sector is limited as a property assets bubble. In addition, Malaysia banks are not very exposed

to toxic financial assets. Besides that, the major effects on Malaysia’s economy come from trade

channels. Private investment fell not only because of an outflow of direct investment by Malaysian

companies overseas; no less important is the decline in foreign investment to Malaysia. All countries,

including Malaysia, has injected monetary and fiscal stimulus significantly to their economies (Khoon &

Hui, 2010). According to Kawai, in 2009, ADB has lowered the forecast for the Asian Pacific region,

from 5.6% to 3.4%. Meanwhile, decrease of 5% for ASEAN countries like Malaysia, Singapore and

Thailand, all primarily vulnerable to recession fears projected by the World Bank. By 40% last year and

the trend ASEAN trade continued to show the world is shrinking.

At the end of 2007, almost all of the financial institutions in the United States and other parts of

the world including international level such as Iceland, Hungary, Country Ukraine, and other Easter

European and Baltic endured heavy losses from their collateralized debt obligations (CDO’s), credit

default swaps (CDS’s), and other financial assets (Sandler, 2010). Luckily, Malaysia’s financial

institutions had slight exposure to these toxic products. Besides, Malaysia’s financial institutions and

banks were in stronger and better shape than they were during the Asian Financial Crisis (AFC) with

better and improved financial management and guideline. The capital adequacy ratio has always equal

more than 13% after year 2001, which is higher than the 8% requirement by the Basel International

standard for minimum capital adequacy ratios of banks. While the nonperforming loan as a percentage

of total loans declined from 11.5% to 2.6% in year 2008, on the eve of Global Financial Crisis (GFC).

Asian countries including Malaysia began to feel the adverse impact to the GFC towards the second

half of year 2008 and early 2009 (Khoon, Hui & Sua, 2010).

According to Masahiro Kawai, Dean, Asian Development Bank Institute (2008) stated that

Asian financial institutions’ exposure to subprime-related products was limited due to three factors: (i)

they were lagging behind global financial institutions in incorporating highly complex financial

innovations into their business models; (ii) many of them were cautious in investing in high-risk, high-

return instruments such as MBSs and CDOs after experiencing their own financial crises ten years ago;

and (iii) their authorities have strengthened prudential supervision and regulation and risk management

practices in their respective financial sectors (Ravenhill, 2001).

The current financial crisis has become a major international event compared to the 1997-1999

financial crisis. The main difference between these two crises is that emerging markets took less impact

than the advanced economies. Mortgages originated in 2007

In the third quarter of 2007, 43% of foreclosures subprime Adjustable Rate Mortgage (ARM), 19% in

prime ARM, 18% fixed rate on prime, 12% at a fixed rate and 9% of subprime mortgages with insurance

coverage of Housing Administration Federation. Clearly, the mechanism

one of the main triggers of a crisis

5.0 Discussion and findings

5.1 Impacts on Malaysia

Global financial crisis actually did not originate in Asia, and indeed, direct damage to the financial

statements. Sector in Asia has been far less than in Europe and US. However, the Asian economies

have been hit hard by a sharp fall in demand in advanced

financial have give several impact to Malaysia in various aspects.

slowdown in GDP growth in most countries of ASEAN and Malaysia's GDP growth rate grew almost to

the level before the 1997 ASEAN financial crisis.

The impact of the GFC under GDP and components is the prevalence of accidents in the

aggregate global demand on the Malaysian economy can be seen from several sectors and markets.

Based on the graph above, Malaysia's economy achi

from 2000 to 2005, in 2006 the real growth rate continued to rise to 5.83 percent. However, in the

middle of 2007 where the GFC was begin, the Malaysia growth rate is little bit decrease compared the

than the advanced economies. Mortgages originated in 2007 however, showed the worst performance

rter of 2007, 43% of foreclosures subprime Adjustable Rate Mortgage (ARM), 19% in


coverage of Housing Administration Federation. Clearly, the mechanism of adjustable rate m

f the main triggers of a crisis (Sapir, 2008).



have been hit hard by a sharp fall in demand in advanced economies and elsewhere. The global

financial have give several impact to Malaysia in various aspects. For the period 2000 to 2006, a

in most countries of ASEAN and Malaysia's GDP growth rate grew almost to

ASEAN financial crisis.



Based on the graph above, Malaysia's economy achieved an average real growth rate of 5.42 percent



7

however, showed the worst performance.

rter of 2007, 43% of foreclosures subprime Adjustable Rate Mortgage (ARM), 19% in


djustable rate mortgage is



economies and elsewhere. The global

For the period 2000 to 2006, a

in most countries of ASEAN and Malaysia's GDP growth rate grew almost to



eved an average real growth rate of 5.42 percent



8

year before the crisis and increase suddenly on 2008. At the end of 2008, overall GDP Malaysia growth

rate slowed to 0.1 percent and a contraction of -6.2 percent in first quarter of 2009 before falling in the

second quarter years of -3.9 percent. In the first two quarters of 2009 the Malaysian economy has

clearly entered a recession due to a decline in GDP. The contraction is expected to further reduce

Malaysia's capacity to reach 2020 income per capita of U.S. $ 15,341 under Vision 2020 program.

Malaysia is expected to record a deficiency of 26 percent in GDP from the 2020 vision of the road. The

Malaysia growth of GDP take more time to absorb the spread, as the growth rate of GDP fell

significantly only from the third quarter of 2008 and the first negative growth rate was recorded only in

first quarter of 2009 in comparison with developed countries and East Asia. However, further

contraction is forecast by BNM throughout the year shows that the worst is not over, and Malaysia will

recovered later from many other countries in East Asia is due. The threat of global economic downturn

was triggered by the financial turmoil of the United States in the year 2008.

Besides that, GFC also effect on Malaysia's exports exacerbated by the fact that more than 40

percent of Malaysia's exports were destined for the G3 countries, which are United States, Japan and

Europe that have been badly hit by the GFC. Exports of goods or services are provided to foreign

consumers by domestic producers or suppliers. The goods that export in commercial quantities

normally need involvements of the customs authorities in both of the country of export and import.

When we are looking at the performance of international trade, exports contracted by 13.3 percent in

Q4 2008, reflecting Malaysia's major export markets slowly. The graph above show that the reduction in

the values of export continuous fall, which is not only, has affected industrial production in export-

oriented sectors, but also indirectly from the reduced demand domestic manufacturing and service

sectors and others as Malaysia is an exporter to the country that are badly effect by the GFC make the

9

demand for the goods and services offer by Malaysia fall down. Many cases in 2000 larger 2001

decrease from those seen during the information technology bubble burst (Kawai, 2009).

In addition, GFC has also affected imports of intermediate goods used in exports. Malaysia

imports electronics, product that base on petroleum, plastics, vehicles, steel products and vehicles. The

main import partners of Malaysia are: Us, Japan, European Union, China, and Singapore. From the

graph, in January 2009, Malaysia's imports contracted by 32% to RM29.5 billion. Over 70% of imports

in this country are in the form of intermediate goods, imports fall faster than exports and Malaysia still

maintain as a small trade surplus. In the first quarter of 2009 exports remained weak with a contraction

of 15.2%. In the meantime; contraction imports continued to increase to 23.5% for this period. Shocks

arising from external market further intensified in Q2 2009, with the reduction in exports and imports for

17.3% and 19.7%.

The impact GFC on investment is the current crisis has reduced overall investment activities

worldwide. Tighter credit and cause a sharp drop in profits, has moved to slow down investment flows.

Investment is important to direct government spending and fiscal stimulus to mitigate effects of the

export contract aggregate demand falls. It is also significant to see the changes for inflow and outflow of

investment to analyze the impact of the crisis on investment flows. In the middle of 2008, a surge in

bank outflows has a negative impact on other investments which recorded net outflows of 11 billion

lower than the previous year with a net outflow of RM46.9 billion, due mainly to repayment of net

external debt by both official and private sector. In the first quarter of 2009, the aggregate demand

recovered sharply before declining again in the second quarter. However, the stimulus must also

ensure that it does not flow out through imports. Overall, Malaysia's investments abroad reached their

height in the second quarter of 2008 before falling sharply thereafter (Abidin & Rasiah, 2009).

10

Moreover, there are also some effects on employment as the consequences from global

financial crisis. Global financial and economic crisis had a negative impact on various industries and

businesses activities. Failure in business and retrenchment is due to the sharp decline in demand in

both developed and developing economies. The sectors most exposed to foreign trade may be

negatively affected by this. To reduce business costs, many firms will reduce wages and benefits;

alternatively, they can also shorten work hours, implementing a voluntary separation scheme and

retrench workers. The government took efforts to create new job opportunities in both public and private

sector even though we have experienced lower unemployment rates than the US and other European

countries (Mei, 2010). Before the crisis, Malaysia has a tight labor market. 3.5 percent unemployment

rate and the presence of nearly 2 million foreign workers to the economic crisis affect employment

opportunities for Malaysians citizens. According to World Bank report, about 8 percent of the

manufacturing workforce of more than 120,000 employees has lost their job because of the present

foreign workers who take the hit not balance. Decrease in number of workers, shorter working hours

and lower wages may have raised the absolute poverty and relative in the city (Khoon, Hui and Sua,

2010).

Other than that, the effect of bank intermediation of the banking crisis make Malaysia's banking

system entered the current global financial and economic crisis from a stronger position compared with

the Asian financial crisis in general. Part of the banking sector reform following the Asian financial crisis

was the consolidation and restructuring of the banking industry, together with improvements in

governance structure, risk management framework, infrastructure and practices, and capabilities

significant buildings undertaken to strengthen the foundations for stability finance. In addition, the

Malaysia's banking system operates in a variety of financial systems, with advanced capital markets.

Total bonds outstanding 86 percent of GDP, provides an alternative sources of financing for the

economy. Financing sources for businesses is balanced between equity and bond markets and the

banking sector, thus diversifying the credit risk concentration away from the banking system, thus

providing the banking system with increased capacity to cope with stress and shock (Ibrahim, n.d.).

The GFC also give impact to the inflation rate of Malaysia (Khoon & Hui, 2010). The inflation

rate in the Asia exhibit patterns during this crisis with other emerging markets-that is, increase from mid

2007 to early or mid 2008 and then fell. It is noted that Asia inflation rate fell faster and further away

from emerging markets, such as in the pre-crisis, the inflation rate in emerging Asia is lower than in

other emerging markets regions. Beside that are exchange rates. At the height of the Asian financial

crisis, currencies of emerging market economies in East Asia except for the mainland China and Hong

11

Kong SAR huge decline in the US dollars. This time, the decline in currencies of emerging Asia is more

modest, particularly with reference to the U.S. dollar.

The next impact is on domestic money market and debt money market. In the domestic money

markets, ample liquidity has been maintained. Financing structure of the Malaysian banking system is

mostly based on deposits of about 70% of the total financing and is primarily denominated in domestic

currency. This is used to ringgit-denominated assets of funds that support the domestic sector.

Depositors same basic balance between wholesale and retail deposits, thus providing a more stability

to bank financing. For the period of July 2007 until September 2009, the banking system also maintains

a comfortable loan to deposit ratios, which average 77.3%. Now, the banking institutes are less

dependent on the interbank market compared to the period before AFC as they already learn

something from the AFC. Since 1998, the banking institutions in Malaysia have been required to

comply with the dynamic minimum liquidity requirements. As a precaution, the ringgit BNM liquidity

facility has been extended to all insurance companies and takaful operators to ensure that surge in

liquidity requirements by insurance companies can be met in the event unexpected increase in the

redemption or surrender of insurance policies in October 2008.

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5.2 Steps taken by Malaysia

Few years ago, Malaysia is a part of the country that suffered during the global financial crisis. But,

because of an intelligent Malaysia’s Prime Minister during that times which is Tun Dr. Mahathir

Mohammad, our country did not take a high risk to borrow money from the IMF that bring the big trouble

on the economies until nowadays such the other countries that borrowed from the IMF.

As a developing country, Malaysia also takes several steps to overcome the crisis. Obviously,

some steps that were taken were very helpful. As Dr. K.S. Jomo (2009) who is UN assistant secretary-

general for economic development in the Department of Economic and Social Affairs, says such a

strategy is crucial or ensure delivery of important development targets such as poverty reduction. Dr.

Dr. Jomo also said that the stronger financial position is due to strong foreign reserves and better fiscal

balances, he said at a public lecture entitled, “The global financial crisis and the economic slowdown:

Implications for South-East Asia and the UN response”, on Thursday night.

With slowing down of inflation that has been decelerated from 8.5% in August 2008 to 3.5% in

March 2009, Malaysia has more room to pursue expansionary monetary policy to support domestic

economy. Bank Negara Malaysia has reduced the Overnight Policy Rate (OPR) three times by a total of

150 basis points between November 2008 and February 2009. According to Bank Negara Malaysia

Annual Report, 2008, p.99 and Monetary Policy Statement, announced by Bank Negara on 24

February, 2009 the OPR is currently maintained at 2%. Meanwhile, the Statutory Reserve Requirement

(SRR) has been reduced by 200 basis points to 1.0%.

There were several methods of solving the financial crisis that has been applied by Tun Dr.

Mahathir Mohammad during the crisis. Most of these methods are the result of the belief that

government intervention can break the deadlock of the turmoil of the financial crisis. Among the

government’s role is discussed in this section is the establishment of the National Economic Action

Council (NEAC), the freezing of the Ringgit, pegging of the Ringgit and the rejection of a loan from the

International Monetary Fund (IMF).

One of the steps is the establishment of the National Economic Action Council (NEAC) by the

government is organized steps to solve this economic crisis. The committee comprises Dr. Mahathir

himself as Chairman, Datuk Seri Anwar Ibrahim as deputy chairman and Tun Daim Zainuddin as

Executive Secretary. In addition, the NEAC also includes the Deputy Governor of Bank Negara

Malaysia, General Director of the Think Tank for Malaysia (Malaysian think-tank) and a number of

corporate leaders from the business. This task force is responsible for implementing the policies

13

contained in the National Economic Recovery Plan (NERP). In addition, it is also responsible for holding

the meeting every day in order to seek solutions to economic problems, trade and currency. All the

results obtained from the task force will be carried out without the need to obtain prior consent of the

Cabinet.

The other step Malaysia had taken is to peg the value of money so they do not continue to fall

in an uncertain world market. Additionally, trading of the Ringgit is only valid if done in Malaysia. This

has helped the government to restore control of the ringgit exchange rate. Malaysia's ringgit peg to the

U.S. dollar value as it is the strongest currency in the world market value. The ringgit has been pegged

at the value of RM 3.80 to USD $ 1 while the Malaysian currency exchange rates on foreign currency

value of others depends on the ratio to the U.S. dollar. The value of RM 3.80 is the most competitive for

Malaysia to compete with neighboring countries in a crisis. This is because if the value of the Ringgit

was pegged at a very high value compared to other neighboring countries Malaysia it will cause the

loss of financial resources from tourism, and food production. Countries that have trade relations with

Malaysia will definitely find a selection of other countries because of cheaper costs offered.

Besides that, Malaysian government has acted quickly to freeze the property Ringgit foreign

investors in Malaysia. This is to prevent freezing of the Malaysian currency from continuing to leak out

of the country in an environment in addition to the financial crisis. As such, the Malaysian currency will

only be running the country next only to maintain the purchasing power of consumers. For foreign

investors, the freeze is to prevent them from investing the Malaysian currency outside the country. They

are only allowed to invest deposits in Ringgit only in Malaysia only to further encourage business and

employment opportunities in the country. As a result of this government managed to restore the role of

self-government powers to determine the exchange rate of Ringgit against the previous currency

trading heavily influenced by foreign investors.

Other step is our government does not receive financial assistance from the IMF funds despite

the offer of U.S. $ 17 billion provided to countries in need. At the beginning of the financial crisis, IMF

control of the fierce money offer recommendations based on the formula of the IMF. However, Tun Dr.

Mahathir has refused a loan from the IMF on a number of factors and his evaluation of the

effectiveness of the IMF in the context of its implementation in Malaysia. Malaysia is unique in terms of

economic policy and development which is the 1970 New Economic Policy (NEP) and the 1990

National Development Policy (NDP) that government intervention aimed at improving the economic

status and restructure society in this country. Distribution of wealth is based on racial mold of the Malay

or Bumiputera, Chinese and Indians. Thus, per capita income and GDP cannot be made yardstick to

14

see the economic status of each family or individual in this country because of the tendency for some

individuals not included in these statistics is very large. Tun Dr. Mahathir Mohamad wonders if the loan

from the IMF cannot be divided equally to all races to create injustice. He was very concerned that if the

matter will be a trigger to race riots as event May 13, 1969.

Back to what was Jomo’s was said before, at year of 2009, will see a drop of 10% in foreign

direct marked slowdown in export growth, especially in Asia. This in turn will result in a significant

slowdown in industrial production. Slower growth will also undermine progress in fighting poverty and

achieving the Millennium Development Goals (MDGs). The priorities include reflecting the economy,

fiscal and monetary measures to spur domestic demand and limit the spread of the crisis across

borders and to the real economy.

Furthermore, the transformation also implemented to overcome the financial crisis, including

the rationalization of the existing institution, the establishment of new institutions and introduction of

foreign competition. In December 2005, Danaharta liquidation is completed success in restructuring the

financial sector, which began in 1998 make Malaysia got less impact from the GFC. It involves the

systematic strategic developments that were implemented through the merger of stockbrokers’

investment banks, merchant banks and discount houses. In addition, the financial landscape witnessed

by regional and international integration more widely. There are three foreign Islamic financial

institutions were authorized to operate, in addition, foreign participation limit has been increased from

30% to 49% for the Islamic subsidiary, takaful and investment banks. Several local financial institutions

to penetrate foreign markets have been operating in a total of 20 countries (Laporan Ekonomi,

2006/2007).

The other step is consolidating the banking sector through merger and acquisition and

increased capitalization. The crisis manifested itself at the end of 2008, the balance sheets of financial

institutions Malaysia is one of the strong as NPLs accounted for only 2% of total loans and loan-deposit

ratio and below 90%. As a result, financial institutions do not face the threat of collapse as in the United

States and Europe. According to BNM (2003), corporate and household debt compared to the value of

financial assets has fallen rather than increased in that time. As such, made contain the negative

effects of the global crisis more easily. The regulatory front, Bank Negara should continue to direct

significant efforts and resources to strengthen its surveillance capability to detect, monitor and deal pre-

emptively with financial risks and vulnerabilities in the global and regional markets system. There are

efforts to develop the financial sector as an engine of growth. Studies have shown that banks play an

important role in promoting the creation of new industries as well as in generating spillover effects to

15

other sectors of the economy. Developed financial sector can also play an important role in mobilizing

talent and business activities to strengthen the R & D efforts leading to increased productivity, which

can drive internal growth in the economy in other sectors.

Other than that, reducing dependency on the existing financial market system and see this

crisis as an opportunity to introduce Islamic financial system through the establishment of expansion of

banks and financial institutions based on the tenets. Islamic finance market is seen to be getting even

in the European community itself. By introducing the actual currency system is a long-term solution to

cope with a repeat of this global economic crisis. Gulf countries are drawing up plans to use a currency

such as the European country is likely to expand the use of this currency all over the Islamic countries.

Khaleej dinar currency will be the currency of international choice if it is made with a backup to the unit

value of oil, for example, 40 dinars a barrel of oil equivalent. The value of such collateral will be a

guarantee to the stability of world currencies option to continue using the dinar (currency gold) and

dirham (silver currency) in international trade now seen as a necessity and needs to be accelerated

Implementation. This also could be an alternative solution to the problem of global finance today, which

is the main cause limiting due to the currency has no value and is easily manipulated backup

(Aziz,2008).

Malaysia is able to overcome the global financial crisis through trade relations with China.

China is emerging as a new economic power in the U.S. as well keep up with the rescue Asia from the

impact of financial crisis in Europe. After 30 years China has emerged as the most rapidly developing

and becoming the second economic power. The proof of millions of Chinese out of poverty while

successful foreign investment increased from two percent to 20 percent in 20 years. China has taken a

cue from the Asian financial crisis of 1998. Malaysia makes China the largest trading partner is the right

choice. Now the total investment in China recorded U.S. $ 6 billion (RM18.6 billion) and China

investment in the country U.S. $ 500 million. Although this figure is not balanced but the situation will

change and political stability would be a factor that could attract the attention of China to invest in the

country. Even the implementation of projects under the Economic Transformation Program (ETP) which

had been announced and many new projects have contributed to a strong domestic economy

movement. This proves that we can hold for possession of a strong domestic economy. One factor is

the source of a competitive economy such as oil palm, rubber, natural gas (LNG) and petroleum.

When the global financial crisis finally began to hit Malaysia in the second quarter of 2008, the

government began providing its own stimulus package. On 4 November 2008, the Government of

Malaysia has announced the first stimulus package of RM7 billion. Would be funds allocated to projects

16

that have high multiplier effects and immediately on the economy. In addition, a number of measures to

support private consumption has also been introduced, such as reduction of Employees Provident Fund

(EPF) contribution from 11% to 8% and vehicle loan eligibility for civil servants higher. Moreover

Malaysia on March 10 the government launched its stimulus program RM60billion (U.S. $ 16 billion).

Around 9% of GDP, this is one of the largest package of fiscal measure relative to GDP as announced

in this region, and follows the RM7 billion stimulus package in November last year. According to the

reports, there are four part of the expenses outlined in the new packages provided for the years 2009

and 2010.

The other steps that taken by the government policy responses. The response of governments

to the impact of the crisis on their economies depends in large part on their vulnerability to external

shocks, their degree of integration into the global economy, especially via trade and financial flows, and

the specific nature of the transmission mechanisms the determine the magnitude of the impact on each

individual economy. A number of countries embarked fairly rapidly on their own stimulus packages,

including Malaysia.

Next step is by resembling the similar policy measures in developed market economies,

governments in developing countries have focused on 4 sets of measures which is macroeconomic

policy, financial policy, trade policy and industrial policy. Policy interventions are determined by both

resource availabilities and the technical competence and ideology of the governments concerned.

Macroeconomic policy is characterized by a combination of fiscal and monetary policy interventions.

Tax-related measures include export tax rebates, temporary custom duty and value added tax

exemptions to reduce input costs in industries where there is no local production and cuts in corporate

tax and social contributions. Expenditure-related measures include increasing expenditure on

infrastructure. With respect to monetary policy, cut in interest rates and reductions in reserve ratios for

commercial banks have been used in an attempt to increase liquidity in financial markets.

Financial policy has essentially been aimed at rescuing distressed financial institutions. On the

assets side, policies have involved governments buying so-called toxic assets. On the liabilities side,

the provision of additional liquidity, expanding deposit protection schemes and the recapitalization of

banks have all been implemented. . Export credit lines and insurance facilities are being increased by

regional and international development banks to ease difficulties in opening letters of credit.

Others step is the trade policy initiatives are taking place within WHO rules, although some

concerns have been expressed about return to protectionism. While there is a general trend to increase

17

tariffs and such increases appear to have been kept within WTO-agreed boundaries, it is possible that

the measures taken by some countries may provoke retaliatory actions in the future. Furthermore, an

industrial policy measures, mainly confined to the most affected developed market economies, largely

consist of the provision of state aid to ailing industries. In developing countries, industrial policy

measures have been more limited.

Malaysia as one of the developing countries must take steps today to ensure prudent financial

regulation and capital account management techniques that can stem undesirable and excessive

capital inflows and to avoid sudden, disruptive large outflows. Equally important is affordable financing

channeled toward productive long-term investments, for example, through development banks.

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5. 3 Effectiveness of steps

After several steps taken by government of Malaysia in facing and overcoming the global financial

crisis, there are some improvements in the chosen indicators.

In some Asian countries, monetary policy is rarely done in the crisis. In this case, to maintain

exchange rate stability as a policy to reduce the policy options. The inflation rate can be reduced by

policy rate cuts widely. In Malaysia, high exchange rate inflexibility and no structural break in exchange

rate regime in the face of crisis. Therefore, monetary policy is likely not part of the measures adopted

during the crisis (Zeilesis, Shah & Patnaik, 2010).

According to research make by Kraay and Severn (2008), expansionary fiscal policy tends to

be smaller in developing countries from the developed world. Malaysia is a developing country. Other

than that, the additional fluctuations driven by procyclical fiscal policy has been found to weaken the

long-term growth (Fatas & Mihov, 2003). Stabilization and stimulation is the type that can be adopted

general policy response (Hannoun, 2009). Measured stabilization policy to accept the fact that the

adjustment is not inevitable and is intended to reduce pain and promote the orderly adjustment. For the

stimulus, it can eliminate the adjustment period at all and it involves a larger stimulus package.

Blanchard et al. (2008) pointed out that the optimal fiscal package should be timely as the need

for immediate action, remain as the moisture will last for some time longer, because contingent need to

reduce the possibility is considered "the Great Depression," others require a commitment to do more

collective, large as the current and expected decrease in private demand a massive diversification as

an extraordinary degree of uncertainty associated with any one step, and sustained so as not to lead to

debt explosion and adverse reactions of financial markets. There are also conflicting views on the ideal

characteristics of an optimal fiscal stimulus packages, such as the opinion of Summers (2008) stated

that the ideal characteristics of an optimal fiscal stimulus packages are timely, temporary, and targeted,

while Taylor (2008) felt that the permanent, pervasive, and predictable.

Effectiveness of fiscal stimulus packages are still in doubt implemented in Malaysia of about 10

percent of the GDP, introduced by the government to fight the global financial crisis. This occurs

because the stimulus package failed to address critical structural weaknesses mentioned earlier.

Otherwise happen that it stimulates private spending to replace public spending. Fiscal deficit to be

higher due to the implementation of public expenditure are met by implementation (Khoon, Hui, & Sua,

2010).

19

Economic situation in Malaysia is projected to decline in 2009 of 0.9 percent and have some

improvements in 2010 of 3.8 percent. In 2009, real GDP growth of Malaysia is expected to marginally

by 0.9 percent compared to 2000 which is 4.6 percent. Malaysia's export demand is decreasing and is

expected to contract 5.0 percent this year. This situation brings real weakness is a substantial risk to

both the resilience of domestic demand and overall economic buoyancy (Malaysia's Economic Outlook

2009-2020, 2009).

GDP growth forecast by expenditure components at constant prices

(Annual change %, constant 2000 prices)

2005 2006 2007 2008e 2009f 2010f

Real GDP 5.3 5.8 6.3 4.6 0.9 3.8

Domestic Demand 5.5 7.5 8.3 6.1 3.7 4.7

Consumption 8.5 6.1 9.9 9.1 2.9 4.4

Private 9.1 6.5 10.8 8.4 2.5 4.1

Public 6.5 4.9 6.6 11.6 4.5 5.5

Investment 5.0 7.9 9.6 1.1 5.6 5.2

Private 3.3 7.5 9.8 -8.1 0.5 2.6

Public 6.8 8.4 14.3 5.9 10.1 7.2

Net Trade

Exports 8.3 7.0 4.2 1.5 -5.0 0.5

Imports 8.9 8.5 5.4 2.2 -3.5 0.9

Note: Bank Negara Malaysia; e = estimate; f = projections by RAM Economics Research

a) Domestic demand

In 2009, growth in domestic demand is seen to moderate to 3.7 percent from 6.1 percent last

year. Expected slowdown in private consumption and investment activity had poor

performance. However, both these components in 2010 should increase towards the year.

Domestic demand is expected to improve in the next year of 4.7 percent.

b) Resilient consumption

Real GDP growth in 2009 will depend a lot on the resilience of domestic demand due to the

threat of slowing exports. However, it also affected the ability to stimulate domestic economic

growth as a result of rising unemployment in the hope of the people and the next can affect the

ability of domestic uncertainty. Short actual unemployment, threats to job security is one of the

20

major psychological impacts of a slower economy, leading to a collapse in consumption.

Therefore, the increase high unemployment is associated with the intensity of private

consumption patterns. Unemployment rose at a rate of 4.0 percent until 4.5 percent. In the year

2009, is expected to edge up just 2.5 percent.

c) Investment trends

In 2009, monetary policy still does not have significant effects mainly on private investment,

which is expected to remain sluggish with not as an estimated 0.5 percent. The private sector

plays an important role in ensuring sufficient investment activity in the economy. In 2010,

investment activity is expected to remain sluggish. However, private investment is expected to

recover slightly to 2.6 percent while the rate of growth of the public sector is expected to ease

to 7.2 percent.

d) Public-sector spending (fiscal stimulus package and impact on fiscal deficit)

Both consumption and investment activity is seen as strong supported by government spending

on stimulus projects and other measures, such as human capital development scheme. As the

result of fiscal stimulus, the total domestic demand increased, public investment is very strong

which about 10.1 percent, while public consumption is expected to grow 4.5 percent this year.

GDP growth remained positive in 2009, although some public sector support is a key

component of the economy compared with other countries to avoid recession.

e) External demand

In 2009, the total value of exports and imports respectively 5.0 percent and 3.5 percent.

Performance of manufactured exports showed a sharp decline in industry production since 3Q

2008. Exports of electronic goods are items most affected by the weakening external demand.

Consumer-oriented products will show a sharper decline in the coming quarter. Declining global

demand, especially products such as key export industries tend to attract a derived demand;

the slowdown is expected in the first half of 2009, and in line with the pattern detected by the

products E & E. The decline in imports due to a slump in demand investment good taking into

account the overall economic activity in the industry that slower. Predictions for 2010 indicate

some recovery of the value of exports and imports, respectively 0.5 percent and 0.9 percent.

21

Country 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Malaysia 3 2.8 3.7 3.8 3.6 3 3.6 3.5 3.2 3.3 3.7 3.5

Malaysia interest rate has been hovering amid 3 percent to 3.8 percent since year 2000 to

2002. Compare to others countries; Malaysia unemployment rate has been relatively stable. Therefore,

a 3.7 percent of unemployment rate was not such a shocking number after all. However, with the

impact of recession felt more 2009 than end of last year, the rate has definitely slipped further today.

According to International Trade and Industry Deputy Minister, Datuk Mukhriz Tun Mahathir it was

predicted by many that the rate may even reach 4.5 percent before end of the year. He said “To us, the

figure is high and we have never reached this high a figure before. At the same time, we are trying to

reduce the jobless rate,” he told reporters after launching the Third National Internship Challenge.

However, in 2010 percentage change of decreasing in unemployment rate is 9.09 percent compared to

the year before. This is proving that Malaysia gradually recovers from the global financial crisis (The

Star online, 2009).

22

6.0 Limitations

In conducting this study, the main limitation was to find sufficient information and materials in regards to

the impacts of global financial crisis on international financial institutions. Most studies that we have

encountered thus far, primarily focuses on the impact of global financial crisis on various other fields;

such as economic, politics, social as well as health. Besides that, a number of journals also focus

primarily on the impacts of the crisis on the different economic regions, with more emphasis put into

examining how differently these regions responded according to the crisis. While we were able to

gather some information on how the crisis had affected international financial institutions, we feel that

the information we have obtained from the journals are somewhat less detailed.

7.0 Conclusion

In conclusion, global financial crisis did not have a very significant impact on Malaysia. This is shown by

the quick recovery that Malaysia has displayed, whereby the Malaysian economy has improved

compared to when the global financial crisis initially hit Malaysia. This quick recovery can mainly be

attributed to the effective and efficient stimulus package undertaken by the Malaysian government. In

addition, early transformation in the Malaysian financial and economic sectors following the Asian

financial crisis has also helped to better prepare Malaysia in absorbing the shocks that resulted from

the current global financial crisis. Overall, the steps taken by Malaysia have served the country well, as

its economy has shown positive signs in recovering from the crisis as early as in year 2010. Finally, it is

suggested that Malaysia strengthen its banking system to ensure abundant reserves for executing

support packages for economic recovery, and also increase its exports and imports with the developing

countries so as to avoid overdependence on the more developed countries in terms of trade, as these

developed countries are more susceptible to global financial shocks.

23

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