Malaysia

Abstract

Malaysia emerged from the financial crisis of 1997–8 relatively unscathed when compared with its regional neighbours Indonesia, Korea and Thailand.¹ This was because local banks and corporations had far more restricted access to foreign borrowings than their counterparts in the other crisis economies (Chin and Jomo 2003). Capital market flows, on the other hand, especially those into and out of the stock market, were a more important factor in the crisis but had a smaller impact on the financial sector (Radelet and Sachs 1998; Chin and Jomo 2001; Chin and Nordhaug 2002). Malaysia was reputed to have one of the better regulated financial sectors in the region and this contributed to its ability to emerge from the crisis in better shape. The fact that the country was able to avoid having to recourse to the IMF certainly attested to its capacity to mobilise resources to confront the crisis. While the regulatory grip of the authorities stretched from significant currency controls on capital account transactions to strict regulation on the activities of foreign participants, this level of relatively greater control coexisted with what was otherwise a generally vibrant market economy. At the time of the crisis, Malaysia had one of the three largest capital markets in East Asia and a banking system that was so fragmented in both number and types of players, including significant foreign presence, that the central bank felt that market consolidation was required to boost the efficiency of the overall market.