Malaysian Counter Cyclical Movement:

A Smart Way to Handle the Recent Economic Crisis


Before Jun 1997, most Asian countries had made a tremendous progress in their economic achievement. The prosper era did not single out Malaysia from having the robust economic growth for more than seven years with an average Gross National Product of 8%. Most economic experts around the globe had labeled the economic scenario in Asia at that period as "gold mines" and to some of them, they labeled certain countries in Asia as "the Asian Tigers". The estimated volume of foreign direct investment (FDI) was so huge and estimated at AS$107 billion invested in the Asia's economy. The positive phenomenon was recognized by several international organizations such as the World Bank, International Monetary Fund (IMF), Standard and Poor Rating Agency and Moody's Investor's Services. If the United States took hundred years to progress in their economy, Asia would only take thirty years to do so.

However, in Jun 1997, a signal of regional economic crisis was sensed after Thailand faced problem in her real estate economic management that suddenly affected her financial stability. A so called "contagion effect" was faced by many Asian countries and there was a sharp decline in all regional currencies. Not only that, some countries were facing more catastrophic political experience due to the side effect of the economic crisis such as the downfall of Suharto's Administration in Indonesia. The blossom years suddenly turned into economic turmoil and the economic prosperity was vanished in just three months. Until today, many countries in Asia are still struggling to restructure their economy. Rather than focussing on the cause of the economic crisis, this paper will give more emphasis on the action taken by the Malaysian government to sustain in facing the economic crisis and regenerate her economy for future economic prosper in the next century.

Recent Counter Cyclical Movement in Malaysia - Establishment of MTEN

By making comparison among ASEAN countries, Malaysia experiences the crisis in more positive attitude. Due to having a very well established economic fundamental and a strong socio-political stability, Malaysia is able to face the challenge of the economic crisis with more confident and with due respect to the cooperation between the government, the private sectors and the nation as a whole. In addition, while facing the crisis, Malaysia is still able to give an emergency loan to Indonesia and Thailand totaled AS$1 billion each and this is considered as regional friendship spirit to help the neighboring countries and to stabilize the regional economy as a whole. In fact, Malaysian government does not have any intention to get financial assistance from the International Monetary Fund (IMF) because "the conditions" imposed by this organization was perceived to be "unsuitable" for the economic restructure in Malaysia due to incapability of such organization to understand the socio-economic culture in Malaysia. However, this does not mean that the economy is not in crisis.

The main problem for Malaysia at this stage is to regain the confidence of foreign investors in the Malaysian economy. This is very essential because Malaysian economic development is relied heavily on the progress of the private sectors, which is a backbone for the economic progress. The crisis has hampered the private sectors tremendously and to some people, they have blamed the private sectors to be the main cause for such economic turmoil. Based on the government purview, rather than being emotional, the private sectors should be reinstitutionalized and reengineered to utilize more effective risk management in facing the unexpected economic crisis. The government believes that the nation as a whole will get the benefit from a strong economic progress with potential private sectors to become the engine-growth for the economy by upholding the principle to fulfil their social responsibility toward the nation in more solid manner. Off course, such practice will only be pretty well engineered by the government through its policy implementation. Government also could not do it alone without a precise input from several economic experts. Therefore, to understand the economic scenario and to propose the rightfully corrective action, the government established a national council named as the National Economic Action Council (MTEN) on 20 November 1997 as an economic advisory council.

This council is made up of many experienced economists in Malaysia. The executive director who is also the country's economic advisor, Tun Daim Zainuddin has been recently appointed to be a Cabinet Minister (used to be a Minister of Finance during the recession years in the 80's) to smooth up the council activities. This council is responsible to give proposals to the government especially on how to tackle the recent financial and economic crisis and how to project the future economic development in Malaysia. Through serious coordination among several government and private agencies, finally the government of Malaysia and the Council have recently disseminated few plans of action to restructure the country's economy and thus avoiding the nation from falls into a stagnating economy. Few of the proposals are briefly explained in the next discussions.

Plan of Action to Generate the Counter Cyclical Measures

Actually, some of the proposals have already been implemented and still in progress. Yet, there are more efforts to be made and coordinated by all sectors and individuals in Malaysia. The major proposals are pretty much related to stabilizing the Malaysian currency, which is Ringgit (RM); to regain the confidence in the Malaysian market; support to maintain and stabilize financial market; strengthen up the economic fundamentals; continue to uphold the ownership and socio-economic equity principle for the nation; and finally restructure all sectors that are badly affected from the crisis.

To meet these objectives, the government has announced an allocation of RM53 billion for development expenditure in 1998 with certain criteria. Such expenditure will be guided effectively so as to avoid any decline in reserves or outflow of liquidity. In addition, the additional expenditure will be used for promoting import substitution activities and increasing exports of goods and services. It will be used also for generating demand for domestic goods and services. Finally it will increase efficiency and national competitiveness and ensure that social safety net is in place. Therefore, in short the allocation will be invested in agriculture, housing, education, infrastructure and public facilities, industrial and rural development, health, poverty eradication, Cyberview (multimedia project) and Asset Management Fund (debt management program). Such expenditure will definitely increase the budget deficit; hence, the government will obtain financial assistance from domestic sources e.g. domestic financial institutions and Employment Provident Fund and if necessary from the World Bank, Asian Development Bank, and Islamic Development Bank as well as through international market loans. In addition, funds will be raised to satisfy the allocation via bond issues in the domestic and international markets.

The government also has set up the Infrastructure Development Fund to finance projects involving public facilities and to ensure that these projects will be successfully implemented during the crisis. For that, the government agreed to establish the National Infrastructure Development Corporation to administer the funds. This corporation will obtain funds through bond issues in the domestic and international markets. Thus, this will reduce the government burdens to finance the stated projects.

Since the financial crisis exposes many problematic issues in the banking system especially to those related to credit facilities, the government has agreed to reduce the ratio of the Statutory Reserve Ratio (SRR) of 5.5% percentage points to increase liquidity in the local economy. 1% reduction of SRR can supply RM4 billion funds into the banking system. The purpose is to ease up the liquidity problem. Such action will enable financial institution to support reviving the economy by providing adequate credits to the business communities that are seen to be more worthwhile for the economy as a whole. In order to strengthen the banking system in Malaysia and to be more competitive than other foreign banking institutions, the government has also urged all banking institutions to start planning to consolidate among them. This is very essential movement in term of restructuring because by doing so, such effort will give the newly structured institution to have a sufficient capital and thus enable to face bigger business risks and able also to provide new loans to the business world.

In fact, since the beginning of the crisis, many banking institutions have faced problem with non-performing loan (NPL); therefore, recapitalization is one means to overcome such problem from becoming devastating. The seriousness of such issue has made the government to introduce a Special Purpose Vehicle (SPV) to spearhead the recapitalization of the banking sector. Thus, a company named "Danamodal" (capital fund in translation) has been set up. The objectives are to further strengthen the position of a group of core domestic banks to enhance their resilience to face domestic and international competition and to inject the capital into weak domestic banks. SPV will also play an important role to restructure corporate debt in more fashionable manner. Extra efforts have been made to strengthen the corporate debt restructure by establishing another company named as "Danaharta" (asset fund in translation). The objective is to take over companies and transactions that face problems with the NPL from the creditor with certain conditionalities. Such set up would minimize the burdens of the creditors. The company will accommodate its funds via bond issues in the domestic and international markets to run its reviving activities.

Interest Rate Phenomenon

In dealing with the interest rate, the Government believes that the interest rate should not be so high, unlike the IMF proposal. High interest rate is not favorable because such action will only give burden to the business community to apply for a loan in running their businesses. In effect, it will hamper the economy due to inenergetic business activities. The interest rate in Malaysia has been lowered to certain accepted level. The inter-bank interest rate is reported to be around 10.5% and the Base Lending Rate will be decreased from 12.08% to 11.5% (August 1998), so the business activities will be more active to generate power in the economy. Since the national savings are considered to be stable (in July 1998, the international reserve is around US$20.5 billion, which is equal to RM83.7 billion) such action is predicted to be wise. In fact, the idea of increasing the interest rate to increase the national reserve as proposed by the IMF does not practically work all the times. It is proven to be true when South Korea and Indonesia have hard time and very slow in recovering the economy although the crisis has gone for a year. Actually, to recover the economy, other economic factors should be recognized according to the scenario of the domestic economy rather than just applying a simple economic model such as interest rate phenomenon.

Other Efforts for Counter Cyclical Steps

Generally speaking, there are many more efforts made by the government of Malaysia to revive the economy and manage the crisis efficiently such as reviewing the FDI and the Employment Act 1955. Malaysian government has set up guidelines to promote FDI. This time such efforts will be done with a very careful measure to promote FDI. For the sake of the long term economic planning, this country needs a truly genuine FDI that has a vision of long term investment and bring more economic advantages to both sides: the investors and the nation as a whole. Inviting foreign investors that prefer a fast profit return will only damage the country's economy due to high capital outflow when they shift their businesses elsewhere. In term of the economic growth, Malaysia has to accept a negative growth in order to sustain during this unpredicted condition of the economic crisis. In fact, regionally, many countries forecast their growth in precautious manner. However, the year 1999, Malaysia projects the GNP growth to be around 5% to 6% provided that the economy is back in regaining the confidence.

In term of managing the employment issues during the crisis, the government has amended the Employment Act 1955 to make sure that there would be no wrong doing practice during retrenching the local employees. Rather than deploying the local employees, measures have to be taken to retrench the foreign workers that have similar job function in the same organization. The writer comments this phenomenon as applying a "Foreign in and Foreign Out" principle. Total of foreign workers in Malaysia is about 2.2 million. From 1994 to 1997, it was estimated that the foreign workers withdrew RM4.1billion to RM6 billion from this country. Further steps have been made to ensure that all foreign workers contribute certain percentages similar to the local workers to the Employment Provident Fund commencing on August 1, 1998. The foreign workers can withdraw the contribution once they leave the country permanently. Such regulation will definitely upgrade the balance of payment for the country. Inflow of foreign workers will be tightly monitored. Government also has reapplied the employment programs used in the 80's for the graduates to readapt themselves with other relevant skills and to avoid an increase in unemployment rate. Furthermore, domestic consumers are urged to reinvest their savings from the international to domestic savings. It is estimated that domestic consumers' savings in the foreign countries are RM20 billion and still increasing. In term of regional economic cooperation, Malaysia has put forth the idea to use local currencies in their trading activities and should avoid using US dollar for such activities. This is considerably important to stabilize the value of domestic currencies for involving countries.

Positive Economic Indicators during the Economic Crisis

Against all odds, Malaysia's economy has achieved a positive improvement in certain sectors. Taking the advantages of the decline in Ringgit value, Malaysian trade balance for 1998 is expected to register a surplus of RM30 billion where this is sufficient enough to finance deficit in service account of RM25 billion. Hence, current account in the Balance of Payment will register a surplus of RM2 billion (first time in 10 years). This expectation is based on the performance of the economy in the first five months this year where trade balance has recorded RM16.2 billion (40.5% increases in export and 20.8% increases in import). In fact, for the first five months, Malaysian export to other developing countries (Group of 15 nations) has totaled RM36.1 billion while import only registers RM15.157 billion from those countries.

In term of FDI, the first six months, 404 manufacturing projects worth RM14.361 billion has been approved and most of them are categorized as technological and export oriented activities. Positively speaking, the Malaysian international reserve in the Central Bank is registered at RM57.6 billion in July 1998. Overall international reserve recently for this country has been assessed to be RM83.7 billion, able to settle the short-term debt values RM57.7 billion for this year.


The efforts made by the government are definitely crucial to revive the Malaysian economy in order to bring back the scenario of the bubble years. However, the recovery process will take more times if all sectors and individuals in Malaysia do not want to sacrify, to cooperate and to support the programs implemented by the government. In doing so, the business communities also have to collaborate to ensure that they will always uphold the collective responsibility. This also will ensure that social responsibility will always be preserved for the sake of the nation as a whole by maintaining a reasonable price and high quality for their goods and services. As for the consumers, they would have to control their expenditure in purchasing more domestic product rather than imported goods. By having a stable political, economic and social institution, Malaysia will be able to come out from the crisis even faster than any of her neighboring countries and thus will be more prosperous in the next century - a revival of the Asian Tiger! It sounds De-Javu.

Azman Mohd. Yusof

Political Science II, Graduate School of Policy Science, Saitama University

September 11, 1998