THE ECONOMIC CRISIS IN 1998 by Nur Syuhada and Teh Su Min

THE ECONOMIC CRISIS IN 1998 

by Nur Syuhada and Teh Su Min

The economic crisis in 1998 began in Thailand when the Thai government decided on devaluation of the Thai baht in 2^nd July, 1997. The economy has entered a slowdown in 1998 which started from South East Asia because case in Thailand has affected Indonesia, Malaysia, Philippines and South Korea as well as spread beyond Russia, China and Brazil.

Among the factors that caused the financial crisis in Malaysia were speculative attacks, deficiencies in risk management, form of corporate governance and equity markets, and the legal infrastructure (Collin & Fancis, 2003). The Malaysia economic was vulnerable due to the unsustainable pace of economic growth an over-valued exchange rates. The relationship between firms, government and banks in Malaysia during the financial crisis period cannot be described as good compared to other Asian countries. There was no clear policy on directed lending to big firms, and to that extent one cannot say that the financial constraints on big firms were weak. The government came out with a high growth policy based on a high ratio of investments to gross domestic product complemented with the promotion and support of certain mega projects, which led to implicit assumptions by lenders that the government would not let those projects fail, which was helped by lending decisions by bankers based on not only a project’s cash flow but also on collateral and implied government support. The over-investment was fuelled by an aggregated demand to outstrip aggregated supply, with a consequently persistent external deficit. Moreover, it had also led to a poorer cash flow and problem of loans.

In Malaysia, the economic crisis has brought impacts to economy and social. In the aspect of economic, the crisis has cause the weak stock prices, downturn of the property market, negative wealth effect due to depreciation of ringgit Malaysia and decreasing in domestic demand.  According to Mohamed Ariff & Syarisa Yanti (1999 ), in  April 1997, the ringgit was equivalent to RM 2.42 per U.S. dollar, whereas later on the value of the ringgit against the dollar depreciated by almost 50%, hitting a high of RM 4.88 to the U.S. dollar on 7 January 1998. Depreciation of currency affect declining in imports but also slowed in the exports.  Besides that, crisis caused investor reduced their investment such as foreign direct investment (FDI) to prevent loss. According to Syarisa Yanti, (2002), to stabilize economy, government had reduced investment and expenditure like reducing the budget for operating expenses by 18%, as well as cancelling or postponing several mega-projects (as cited in Zaherawati, Zaliha, Nazni, & Mohd Zool Hilmie, 2010).