This article first appeared in The Edge Malaysia Weekly on March 30, 2020 - April 5, 2020

SINCE independence, Malaysia has had three periods of major economic shocks. It is worth noting that the causes of each crisis were very different in nature, given that the country was at different developmental stages over the last four decades.

Commodities shock in 1985/86

The 1985/86 economic crisis was triggered by the high interest rates in the US, which is better known as the “Volcker Shock”. Paul Volcker was the newly appointed US Federal Reserve chairman and, in 1980, to rein in rising prices, he instituted record-high interest rates, which led to a collapse in world commodity trade.

Malaysia, being an exporter nation, suffered as primary commodity prices fell and demand for manufactured goods declined. Malaysia’s overall export price index fell 30% as tin and palm oil prices plunged.

The major issue during the 1980s was the heavy industry programme that the nation had embarked on. Heavy Industries Corporation of Malaysia Bhd was a public-sector entity that was established to carry out heavy industry projects.

The programmes then involved massive government expenditure, which was partly paid with petroleum revenue, but it was insufficient, and the government began borrowing against future oil revenues. Unfortunately, commodity prices, along with crude oil prices, crashed from 1985 through to 1986.

The government had to embark on an austerity drive as a result of the ballooning debt from the heavy industry programme.

Malaysia fell into a recession in 1985, with its gross domestic product (GDP) contracting 1% that year. The unemployment rate rose to 5.6% in 1985 and 7.4% in 1986. The non-performing loan (NPL) ratios of commercial banks hit a high of 30% in 1987 and 1988.

The government then embarked on a contractionary fiscal policy and devalued the local currency. There was also an emphasis on promoting foreign direct investment in the economy. For the financial sector, new prudential regulations were introduced in 1989.

Asian financial crisis 1997/98

The Asian financial crisis in 1997/98 is deemed as one of the worst economic crises Malaysia has ever faced (until now, that is). Its main cause, according to academics, was the wholesale adoption of financial deregulation in both capital accounts and the banking sector.

“Unregulated capital flows, coupled with pegged exchange rates, brought a surge of capital flows into Southeast Asian economies, which were taking advantage of arbitrage opportunities,” says a report by The North-South Institute published in 2012.

When the Thai baht came under speculative attack in mid-May 1997, the ringgit saw heavy selling pressure too, causing it to plunge to a low of 4.90 against the US dollar in 1997 from 2.40 previously.

Net portfolio investments shrank RM22 billion to a deficit of RM12.9 billion in 1997 from a surplus of RM10.3 billion in 1996. It was a colossal mess as the stock market crashed while corporations that were highly leveraged in foreign-denominated debt started defaulting one by one and NPLs soared, which then turned it into a banking crisis.

The economy declined, with the GDP contracting 6.7% in 1998 from a growth of 7.7% previously. The ringgit fell to its lowest of 4.90 against the greenback in January 1998.

The measures that the country undertook then were deemed unorthodox. Among them was a ban on the offshore market trading of the local currency in September 1998 to curb speculation of the ringgit.

Tun Dr Mahathir Mohamad, who was the prime minister then, fixed the ringgit exchange rate at 3.8 to the US dollar. Malaysia also embarked on selective capital controls to discourage speculative short-term portfolios.

To revive the economy, in July 1998, the government announced a RM2 billion fiscal stimulus package, which worked out to about 1.5% of GDP at the time.

On the corporate front, the government set up various agencies to restructure financial and non-financial institutions. The Pengurusan Danaharta Nasional Berhad Act 1998 was passed, giving the national asset management company powers to take over NPLs from banks, to be restructured and managed. Danamodal Nasional Bhd was set up to recapitalise and restructure troubled financial institutions. The banking system was further strengthened through mergers and acquisitions.

The Corporate Debt Restructuring Committee was formed as a platform for distressed corporates and lenders to work out feasible debt resolutions without resorting to legal proceedings.

Global financial crisis 2008/09

The global financial crisis of 2008/09 that started in the US was caused by excessive lending by banks, especially housing loans. Banks were repackaging these debts and selling them to investors. When the property bubble burst, it sent borrowers into default and sparked a domino effect that crippled the US banking system, which eventually pushed some into liquidation.

For Malaysia, the country suffered the impact in terms of financial and trade channels. Malaysia, a trade-dependent country, was severely hit in its trade and investments.

Exports fell 45% to RM38 billion in January 2009 from RM64 billion in July 2008. Like other Asian countries, Malaysia suffered capital flight. Portfolio investments saw huge outflows and the stock market, which had high foreign participation, was hit as foreign investors repatriated funds.

The economy fell into a recession, contracting 1.7% in 2009.

The government unleashed two fiscal stimulus programmes amounting to RM67 billion, roughly 10% of GDP in 2008 and 2009. The first stimulus (RM7 billion) was aimed at projects with high-multiplier impact on the economy. They also undertook measures to support private consumption such as reducing the Employees Provident Fund contribution rate to 8% from 11%.

The second stimulus package in 2009 was seen as the biggest in history at a massive RM60 billion, made up of a combination of fiscal injections, government guarantees on bonds and private loans, investing in equity stakes for projects with high-multiplier effects, private finance initiatives and tax incentives.

Meanwhile, Bank Negara Malaysia cut interest rates thrice, totalling 150 basis points, and the overnight policy rate fell to 2%.

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