The of 92-year-old Mahathir Mohamad as the prime minister of Malaysia was phenomenal in its own right, but more so in the context of the hope and expectations Malaysians have for him to rework the economy.

The general election held on May 9 was a turning point in Malaysia’s 60-year history. For the first time the ruling coalition, Barisan Nasional (BN), failed to win and form the federal government. This is a truly remarkable and extraordinary success for a myriad of reasons as the Pakatan Harapan — the coalition that Mahathir leads — victory was against all odds, including allegations of electoral fraud, a well-oiled and well-funded incumbent election machinery, and an opponent largely in control of the traditional media.

Despite some last minute delaying tactics by the previous administration led by before Mahathir was sworn in as the seventh prime minister, the transition of power has been peaceful and in accordance with the rule of law. This is a testimony to the world that even in a flawed democracy, the ability to change government without violence is possible. Lee Kuan Yew, the first prime minister of Singapore, in responding to a question on the attraction of democracy, said, “The greatest attraction of democracy is you can change government without violence.”

The differing views on current economic performance

The Merdeka Center, an opinion research firm in Malaysia, shows a consistent that from the end of 2013, the primary concerns for most voters in Malaysia were related to the economy, in particular, the rising cost of living. This plots the gross national income (GNI) per capita in US dollars and corresponds with difficult periods faced by the Malaysian economy. The most recent period shows contracting GNI per capita in dollars, which is an issue the new government must resolve.

While GNI per capita in dollars is a more appropriate benchmark for cost of living and the wealth of the populace, the outgoing government, in defending its management of the economy, pointed to high GDP growth as normally measured in the domestic currency, low inflation, low unemployment, improved Gini coefficient and reduced government deficit. However, observers and financial commentators point to the weak demand in the retail sector, serious cost of living issues despite the ostensibly low inflation rate, increasing youth unemployment, and greater disparity between the rich and poor.

Whilst there have been programs such as the One Malaysia People Assistance Program (BR1M) to help the poor through the distribution of direct cash from the government, the middle class faced increasing costs arising from the dual effects of the imposition of goods and services tax (GST) and a depreciating ringgit. Critics of former Prime Minister Najib Razak also pointed to the high levels of government debt, not to mention the contingent and off-balance sheet liabilities in the form of long-term lease payments, which are not manageable and have burdened the government finances. In addition, there are structural issues that the central bank has highlighted in its most recent such as low wages, the plague of unemployment/underemployment faced by the younger generation, and the lack of .

Risk to the economy

Bank Negara Malaysia, the country’s central bank, in its for the third quarter of 2017, pointed out the potential risk of purpose-built in Malaysia. This included the most developed areas around Kuala Lumpur (Klang Valley), where the office vacancy rate is to reach an all-time high of 32% by 2021, which is significantly worse than that during the 1997 Asian financial crisis (AFC) of 25.3%.

Furthermore, the oil and gas sector, which is vital to the Malaysian economy, requires restructuring as well as government leadership following the crash in oil prices, which resulted in the industry facing overcapacity of oil and gas services and declining margins. This is not surprising as “quantity of money” for the industry has contracted, as can be deduced from , PETRONAS.

Altman’s Z-score analysis of public-listed companies within the sector shows a declining trend, and several oil and gas services companies such as (a subsidiary of Marine and General Berhad), and , have announced that they are experiencing financial distress and undergoing restructuring. With the current crisis looming in the oil and gas sector, a laissez-faire approach will likely be ineffective to revive the industry. What is required in such a crisis is government intervention — i.e. expansion of the quantity of money to stimulate demand in the industry.

Pragmatic Economic Leadership

The perspective of the new government based on its election manifesto has already received criticism as a populist policy because of the promised abolishment of GST, introduction of subsidies, write down of loans for the Federal Land Development (FELDA) settlers, abolishment of toll for highways, and deferment of repayment for student loans.

Perhaps some insights can be gleaned from the events during Mahathir’s earlier tenure as prime minister between 1981 and 2003. The period prior to the mid-1980s crisis was dominated by a push toward heavy industry championed under HICOM, a Malaysian company, which included the automotive, iron and steel, plastics paper products and machinery, transport equipment and building material industries. The petrochemical sector was advanced by working with foreign partners who would provide technical knowledge, but with capital coming from the state.

In short, this was a departure from previous fiscal policy and sought to accelerate the new economic policy (NEP) — i.e. macroeconomic policy activism, such as a rebalancing the wealth in the country in favor of the majority Malay/native population.

However, commodity prices collapsed in the 1980s in response to Chairman of the US Federal Reserve Paul Volcker’s fight against inflation, which caused interest rates in America to rise significantly. As such, major Malaysian commodities such as rubber and tin suffered the same fate and, as a result, Malaysia faced a twin deficit (current account and government budget) during that period. In 1985, the Malaysian economy contracted by 1% and grew by a meager 1.2% in 1986. Furthermore, nonperforming loans (NPL) at banks rose above 30% due to a wide number of corporate failures. One of the hardest hit companies, HICOM, lost approximately $100 million. Finally, the stock market crashed due to the Pan El Crisis.

The government led by Mahathir responded with a series of adjustments, which included:

1) Contractionary fiscal policy

2) Relaxation of NEP — i.e. Investment Coordination Act, which was made only applicable to investment above $1 million and businesses with more than 75 employees. Importantly, free trade zones were created in which there was exemption from NEP policies on ownership.

3) Budget deficit reduced and managed a current account surplus

4) Introduction of the Banking and Financial Institutions Act (BAFIA), limiting exposure to foreign exchange (FX) borrowing, which allowed critical policy flexibility in 1997 during the Asian financial crisis and related party loans

5) Appointment of private sector CEOs to government-owned companies, which had mixed results, as illustrated with the winding up action against Perwaja Steel in 2017

6) Boosting foreign direct investment (from less than $500 million in 1986 to $2.3 billion post reform) and the promotion of services — e.g. tourism such as Visit Malaysia Year 1990 — and efforts to reduce current account deficit from the services sector through the use of local ports and domestic transportation.

The result foresaw a period of extraordinary growth, low unemployment (virtually full employment) and low foreign debt up until the Asian financial crisis. Extraordinarily, the government ran a surplus budget during that period.

Whilst the AFC of 1997 was perceived as an exchange rate crisis, in reality it was a credit crisis. The credit crisis arose because credit evaluation and validation were certainly much better, comparing the new cycle against the past — i.e. conditions preceding the Asian financial crisis as compared to the mid-80s crisis. This led to credit expansion, and the said credit expansion was possible given the inflows from foreign direct investment (FDI), offshore lending, flows into the stock market, and money creation by commercial banks. The banks could create more money as capital was increased to meet status of new capital regimes imposed by the central bank (Tier 1/ Tier 2 capitalized banks).

Noteworthy, leading economists point out that it is possible to expand credit for long periods of time, as witnessed in China, and not suffer a credit crisis if the country maintains capital controls and run a major trade surplus. In contrast to this, pre-Asian crisis, Malaysia neither enjoyed a trade surplus nor had a closed capital account.

In respect of the government surplus, there are two notable points. First, some infrastructure projects that were never commercially viable were undertaken by the private sector financed by debt. These loans inevitably became NPLs because the projects should have been public sector funded. Such projects did not have to be commercially viable as there was benefit for the public and the overall economy. However, it distorted public sector funding debt ratios, and inevitably these projects were “nationalized” once the loan turned bad.

The second important point is the widely held notion that governments worldwide should run government finances like household or corporations — i.e. they must run a surplus. This is simply not true, excluding the external sector, because if the government saves, then conversely the private sector (i.e. businesses and households) cannot also be net savers and need to borrow. Thus, the corporations were significant borrowers before the Asian crisis. Unlike households and corporations that are not able to create money, borrowing in the country’s own currency does not pose a similar threat to government as it does to households and businesses. Obviously, this does not mean governments should not be prudent in spending and managing the budget.

During the AFC and under Prime Minister Mahathir’s leadership, Malaysia had the distinction of being the only one of the four Asian crisis countries that neither sought International Monetary Fund assistance nor changed the government. Despite a sharp devaluation of the currency, the devalued ringgit quickly allowed trade deficit to turn into a surplus. To this was added the government-led restructuring of banks and large corporations. Capital controls created flexibility to reduce interest rates and spur credit expansion. The supply of money grew after the crisis from increased government spending and pent up demand for housing — i.e. mortgage lending.

Accordingly, the money supply and the country recorded growth. These issues are much better understood post the global financial crisis of 2007-08, but at the time, Malaysian government policies were thought of as unorthodox and received wide spread criticism. The policies were eventually vindicated as Malaysia’s cost from the crisis was amongst the lowest. During the AFC, the government formed the National Economic Action Council (NEAC) that oversaw the recovery and begun initiatives in areas for new economic growth in sectors such as education and health care, which have grown to be successful export earners and contributed to the trade surplus.

The Second Coming of Mahathir Mohamad

The brief economic history gives some useful insights on how Mahathir approaches issues and can allay some of the fears that analysts have regarding populist policies. The first observation is that he has a pragmatic approach to solving problems and a proven ability to adapt to changing conditions. Second, change is driven at a policy level and translated to implementation through broad measures and via government ministries and departments. This practical and effective approach to driving change at a national level has the advantage of not using expensive consultants, creating many costly new agencies and alienating civil servants.

The new government is likely to counter the loss of revenue from abolishing GST by reintroducing sales and services tax and reprioritizing its expenditure, as well as careful and tight financial management. The record claimed in the Penang and Selangor state governments could give reasons to believe that savings can be made, as the current national government has these component parties administrating the country. Although these claims have been contested by the state opposition in Selangor and Penang, there is no doubt given corruption scandals like ) that there is huge potential for savings.

For those involved in transformation or change, one of the best approaches is to take radical steps. In that vein, if revenue is reduced, it will automatically force the government to cut expenses. If such radical steps are not taken, there will be continuous procrastination in removing wastage and initiating efforts to ensure the deficit does not worsen. The caricature of being minister of finance perennially handing out goodies is simply unsustainable, and the prudential management of finances will become necessary due to the reduction in revenue.

The other concern raised relates to how Malaysia manages its relationship with China. Today, China is Malaysia’s largest trading partner and major investor. Prior to the general elections, there was criticism of then-Prime Minister Najib and the mega deals he entered with China, including the estimated 55 billion ringgit ($13.8 billion) East Coast Rail (ECRL) project. Cancellation of the ECRL by the new government could provoke a negative reaction from China. In April 2018, Najib pointed out the risks of jeopardizing relations with China when he , “If China refuses to buy important Malaysian exports such as palm oil, furniture and timber, who will buy them?”

However, Prime Minister Mahathir has reassured markets and he would lead a business-friendly administration, and that Malaysia would seek friendly ties with other countries as a trading nation. Moreover, Malaysia’s track record during Mahathir’s tenure in the 1990s and substantial FDI gives credence to his assurances. Nonetheless, the experience in Sri Lanka with China following the change in the Sri Lankan government after the 2015 election and dealing with legacy contracts by the predecessor regime indicates there could be challenges in respect of the relationship with Beijing.

For completeness, an obvious concern would be if Mahathir returns to some of the alleged excesses of the period when he was prime minister for 22 years. This includes crony capitalism, suppression of freedom and weakening of the institutions. However, we can take comfort that the government now includes people who have stood by their principles of better governance for decades, a more vigilant population and the impact of social media. Also, at the age of 92, it is unimaginable that the prime minister would want to partake in such practices. Moreover, the opposition in the form of BN and the Malaysian Islamic Party (PAS), who have significant representation in parliament, can work as the effective opposition and provide the necessary checks and balances.

Reform

The Asian financial crisis caused a change of governments in Indonesia, Thailand and South Korea. The change of government in Malaysia may also have its roots in the AFC because that period saw the birth of the reformation movement led by politician Anwar Ibrahim. Noteworthy, the Chinese character for the word “crisis” is made up of the characters for danger and opportunity. Malaysia, as it has gone through the dangerous time without any significant violence, can now seize the opportunity. The country has been able to effect a change of government (never before achieved with its attendant risks) and now stands ready to grasp an opportunity to remake its destiny.

Many of the suggested policies in the Pakatan Harapan manifesto can improve the economy by greater competition and breaking up monopolies, which will return higher tax revenue in the longer term. Similarly, better utilization of existing infrastructure, as well as building high-quality infrastructure assets such as high-speed railway between Kuala Lumpur to Singapore, would be an impetus to economic growth. The role of the state in the economy and options for privatization could be revisited dealing with issues of crowding out and unfair competition.

While reforms may be beneficial to the economy, it can be rather difficult to implement the policies due to substantial resistance from powerful elites. Dani Rodrik, a renowned Turkish economist,  pointed out in that when unaccountable powerful groups of people expect to see their privilege disappear because of reform, they will use their influence to introduce economic policies that redistribute income or power to themselves. As compared to a developed nation, reforms are most effective in “intermediate countries” such as Malaysia, where hitherto the political elites were dominant enough to oppose and derail the reform movement and the benefits of reforms have yet to be fully reaped.

On public acceptance of reform, that an implemented beneficial reform that goes on to create more winners than losers is often most accepted and not repealed, even if it initially lacks popular support. In this respect, Prime Minister Mahathir has a track record of unpopular reforms — e.g. capital controls, when required during the AFC, education of mathematics and science in English, and the rolling back of NEP — but it became accepted eventually.

In Malaysia, future policies could result in growth that is sustainable, of better quality and that deal with critical risks that the economy could face. Predicting the future is difficult, but there is hope and an incredible opportunity for a much better Malaysia.

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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±ő˛ÔĚý, the Bank of Thailand withdrew from intervening (pegging Thai baht to US dollars) to defend the baht when its foreign reserves effectively dropped to just $7.5 billion after taking into consideration off  of $23.4 billion. Therefore, it simply became untenable for the bank to continue defending the baht.

Arguably, that was the “official” start of the . Twenty years on, it is an interesting story to share especially when told by those privileged to serve Malaysia and who were given an opportunity to formulate and execute the solutions during that period.

Causes of the crisis

The cause of the Asian crisis will probably be long debated by economists and political analysts even after the 20th anniversary. The underlying reasons range from fixed exchange rates, current account deficits, reckless lending and currency speculation to crony capitalism. For example, one end of the spectrum lays the blame squarely on crony capitalism in the emerging market economies of East Asia, and the other on foreign parties that were hell bent on destroying Asian economies and creating a new dawn for neocolonialism.

The two extremes aside, aspects such as managing trade balances, sound credit practices in the banking industry, and realistic exchange rates are generally accepted as matters that governments are expected to adhere to in order to avoid future crises.

However, there are claims that the weakness was due to a “directed economy” and “capital allocated” based on government influence, enabling high growth achieved by the East Asian economies before the financial crisis, but this remains debated by economists. Similarly, the argument for a free, unfettered flow of capital and unrestricted trading practices, including short selling to derive profit — championed by the advocates of capitalism against the proponents who argue for the rights of nations to safeguard the welfare of their citizens via regulations and restrictions on capital — will continue to be debated.

Reaction

Once the crisis began, the reactions and approach taken to resolve it differed. Though many were ready to acknowledge the crisis, some were still in denial and continued to insist that stress tests undertaken by the regulators on banks showed a sound financial system. Moreover, some of the measures such as the establishment of Danaharta, an asset management company, were deemed merely as pre-emptive.

However, a more likely scenario was that the weakness in the banking system existed pre-crisis and the exchange rate decline was a mere trigger to the full-blown credit crisis. The renowned Professor Edward Altman pointed to back testing data for the three other Asian crisis countries by the World Bank, which proved such weaknesses in the banking system existed before the crisis. Perhaps those in the know in Malaysia would concur with a similar view on the country’s situation. Indeed, the combined level of nonperforming loans (NPL), including those acquired by Danaharta, reported by banks and those under the Corporate Debt Restructuring Committee (CDRC) at the  in 1998 was 18.6%, which exceeded the 10% NPL ratio synonymous with the benchmark on what is recognized as a credit crisis.

Notably, during a lunch at the Lake Club to introduce the newly-formed management team of Danaharta to senior central bankers, discussion on concerns of a lost decade ensued. For those who were young, probably foolish and still brimming with the confidence of Malaysia in the 1990s and the “can-do” attitude, it was never doubted for a moment the ability to turn around the situation. Regrettably, this was more likely a case of foolish bravado rather than deep intellectual insights over the situation or intuition of finding the right solutions.

Learning from others  

At the beginning of the crisis, uncertainty prevailed when deciding on strategies and tactics moving forward. Indeed, advice from global consultants was sought and, in some aspects, their inputs were invaluable. For example, Arthur Andersen contributed to the legal team’s efforts in drafting the Danaharta Act. Other advice proved to be polite but was less than effective. Yet some foreigners genuinely helped by sharing their real-world experiences they had from earlier credit crises such as that in Sweden.

An excellent example was that there was no need to raise USD debt, or for that matter any new “money” to acquire the NPLs. The approach to raise the debt was originally planned to be undertaken by a large global investment bank that would have enjoyed substantial fees had the bonds been issued. These multibillion USD borrowings based on commercial rates were considered necessary to maintain Malaysia’s financial policy independence by shoring up reserves with USD funds raised, converted into Malaysian ringgit and then used to acquire NPLs.

This negated the need to approach the International Monetary Fund and allowed Malaysia to manage its financial matters independently. However, borrowing USD at commercial rates on the international debt market would have been a disastrous undertaking, given that Malaysia’s sovereign rating had fallen to just one notch above junk status.

The former CEO of Securum pointed out that an NPL is a funded position and does not need new funding. As such, an asset management company (AMC) merely needs to borrow from the bank (i.e. an existing lender to acquire the NPL). The lesson learned that an NPL is a funded position proved to be invaluable. Like many other foreign ideas that were borrowed, this idea was adapted and enhanced with Malaysian innovations. To this end, Danaharta’s zero coupon bonds were created, tied in with a novel incentive program for the banks, which sold their NPLs to share on the upside as well as provide a window for liquidity via Bank Negara Malaysia (BNM). This not only resolved the funding issue, but sped up the carve out of NPLs, which then accelerated commercial banks’ return to their critical lending activities that had all but ceased at a substantial number of financial institutions with the onset of the credit crisis.

That idea of revamping an existing workable model was not only applied to Danaharta, but also when its chairman and management were subsequently requested to chair and operate the CDRC. The CDRC was originally set up based on the London approach toward debt resolution, and the first model operated using a rotating chairman picked from amongst the lenders and implementation was based on a consensus view. However, what became apparent was that senior bankers with frontline responsibilities for their own bank could not dedicate their time, nor consistently apply policies and decisions compared to what a dedicated full-time chairman of lenders meeting could perform. Therefore, one of the key improvements was centralizing the chairman of the creditors meeting.

Moreover, the new team tightened and enhanced its procedures on achieving milestones, and also introduced greater “persuasion” from the central bank in respect of reaching consensus and coordination with Danaharta on the possibility of using the Danaharta Act to reduce the majority required to approve schemes of arrangement. BNM, via its press release on July 23, 2009, that the “CDRC was first established during the 1998 financial crisis and was successful in resolving 57 cases with a total outstanding debt of RM 45.8 billion, helping to accelerate the country’s economic recovery.”

Broader Economy

During the crisis, the policy trilemma from an economic perspective was truly understood. The policy trilemma, also known as the impossible or inconsistent trinity, states a country must choose between free capital mobility, exchange-rate management and monetary autonomy (the three corners of the triangle in this ).

The point was reiterated by Noble Prize-winning economist  in 1999:

“[Y]ou can’t have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain—or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe).”

Businesses in Malaysia required stable exchange rates as the country continued to have an open-trading economy that had large imports and exports denominated in USD. It was clear that interest rates could not influence exchange rates in a crisis without severe repercussions as previously proven elsewhere in the world — e.g. the British pound crisis during the departure from the exchange rate mechanism. Early attempts in increasing interest rates proved disastrous. The increase in interest rates had several severe impacts, including higher unsustainable cost of debt, fall in demand and decline in asset values.

It should have been clear to all and sundry that the policy by the IMF and World Bank to advise on an increase in interest rates was flawed and would worsen the crisis. Only when currency and capital controls were established could interest rates be brought down significantly, insulating monetary policy from volatility due to fluctuating currency. This allowed businesses to breathe, increased confidence, provided stability and caused asset prices to rise.

Moreover, in respect to asset price rising, residential property prices could increase as interest rates began to fall and new products such as the base lending rate (BLR) plus zero financing began to emerge in response to falling interest rates. Also, the pegged exchange rate was set at a mark that people were confident that ringgit was undervalued and there was no hurry to take out the monies through the black market. The strong trade surplus that followed also ensured that the exchange rate could be sustained. Fortunately for Malaysia, the policy misstep with regard to increased interest rates adopted at the onset of crisis was brief — as seen by this graph — and did not have the debilitating effect on the economy it had in other Asian crisis countries.

The Results

°Őłóľ±˛őĚýgraph from a book entitled , shows the comparisons between country performances in the period relevant to the Asian crisis. As seen by several of the measures, Malaysia outperforms those countries that followed the IMF prescription.

The cause of the Asian crisis will probably be long debated by economists and political analysts even after the 20th anniversary. 

One of the reasons for this success was the coordinated effort by the National Economic Action Council (NEAC) and BNM, with specialist agencies created during the crisis with . “Malaysia has achieved considerable progress in implementing these reform in comparison to other crisis countries. The approach adopted by Malaysia (and also Korea) in resolving bad loans problems and restructuring banks involved a high degree of government involvement, which had the advantage of speed and coherence.”

Whether or not exchange control played a significant role is still debated because, at that time, a fair degree of stability had been established in the region and there was consensus that ringgit was undervalued. However, unorthodox approaches to crisis resolution has gained wider acceptance. Iceland is a more recent example of a crisis country that implemented unorthodox solutions and posted better results compared to Ireland which, at the onset of the global financial crisis, did not have as severe a problem as Iceland.

°Őłóľ±˛őĚýĚý˛ąłŮ The Washington Post compares the growth in GDP between Ireland and Iceland followed by between Iceland and Greece.

 sharply reduced spending, more than Ireland, and increased interest rates up to 18% to rein in inflation. The country allowed its banks to go bust (did not repay foreigners for their reckless lending) and let its currency collapse whilst putting capital controls in place. Certainly, Iceland’s economy has outperformed Greece, which remains beleaguered with economic malaises and severe hardship for its people. It takes bravery to force an economic reset that addresses the underlying issues, but Greece cannot pull the same trick because its .

It is acknowledged that significant financial and balance sheet reform took place in Malaysia following the Asian crisis. Weaker banks were merged with stronger banks rather than being liquidated, and domestic financial institutions were recapitalized and, therefore, this reduced the catastrophic events associated with bank closures. This lesson was learned from the crisis in the 1980s and thus the option of bank mergers was pursued rather than bank closures, unlike in other Asian crisis countries. Infrastructure-related privatization was brought into the government fold and corporations’ balance sheets were improved.

However, whilst restructuring did take place, it was mainly financial but not so much on critical operational restructuring. But this criticism is perhaps unfair as corporate exercises such as mergers and acquisitions arose following the aftermath of the Asian financial crisis, which led to the revamped Air Asia; a merger of various banks in Malaysia forming CIMB; and the formation of SapuraCrest and later with Kencana Petroluem, forming Sapura Kencana — which are some of today’s leading corporations in Malaysia.

There are also cases of foreign ownership that had benefited the country, and companies with stronger balance sheets were able to grow successfully. It was recently pointed out by a leading economist from an investment bank that following the Asian crisis, the efforts in the 1990s at expanding infrastructure and investment into manufacturing and reformation of the financial sector spurred economic growth and paid dividend in the 2000s — i.e. the economy did grow well in the period following the tech bubble bust right up to the global financial crisis without large growth in credit expansion or high oil prices.

Total public debt over GDP has been increasing for the first few years post-crisis, as corporate investment has increased along with fiscal stimulus plans by the government. Subsequently, total public debt over GDP has been fairly consistent post-2005, suggesting macroeconomic stabilization (steady growth in credit).

Lessons learned

For completeness and as a useful conclusion, some of the lessons learned are set out below.

First, no doubt the leadership provided by the government was instrumental in managing the crisis successfully, in particular after the initial stage of being decisive, focused, demonstrating the ability to adapt and being steadfast on the direction once it was clear. Strong government facilitated the passing of important legislation during the time such as the Danaharta Act, which was an important factor in debt resolution.

Second, the presence of strong economic institutions such as the NEAC, MOF, BNM (CDRC, Danaharta and Danamodal coordinated by BNM) and the securities commission enabled the policies and approaches to be implemented effectively with credibility and instilled investor confidence.

Third, debt was substantially denominated in Malaysian ringgit and not in foreign currency. Even foreign currency debt can be a manageable problem if it is not sovereign-related or implied sovereign guaranteed — i.e. private sector-related as in the case of Iceland. At worst, debt of domestic corporations denominated in foreign currency can be written off once assets are foreclosed and, therefore, the losses would be limited and shared by foreign lenders.

However, if debt is in foreign currency and sovereign-related, the implication of default is severe as foreign banks and bond holders leverage on this point at the expense of the nation. Argentina and, more recently, Mongolia are examples of countries with high levels of sovereign debt denominated in foreign currency when they defaulted.

Fourth, the driving force of the economy is entrepreneurs. Therefore, the preservation of genuine entrepreneurs is critical, and this is also positive for banks and lenders. Entrepreneurs are the people best placed to turn things around even in distress as they know the business, have the entrepreneurial drive, risk appetite and, above all, the willingness to put risk capital into the business. Contrast this with liquidators who, despite being professional, have diametrically opposite characteristics.

In any case, supporting entrepreneurs is also in the best interest of lenders, which is well known to most bankers in bank recovery divisions and restructuring specialists. Danaharta provided comprehensive data in its final annual report, which supports this proposition.

Fifth, the importance of bottom-up analysis on credit markets and capital deployed so far has indicated that “back testing” some of the Asian crisis countries by the World Bank showed that financial weaknesses could be clearly identified before the crisis. The exchange rate crisis was a mere trigger that set off what was an existing weakness in the economy and quality of credit. Similar analysis has also indicated that Greece and the US exhibited the same characteristics prior to the global financial crisis.

Sixth, having the right people remains one of the most important factors. During that time, a great number of bright people were drafted to serve Malaysia. They were not only highly-talented individuals, but they also had the capacity to learn quickly, adapt and innovate. Rising above all challenges during the time, they worked well as a team of Malaysians that produced exemplary results. This was well acknowledged and many went on to advise other countries facing a financial crisis or those that were keen on setting up their own asset management company.

Finally, probably the most important lessons are what the late Yang Amat Mulia Tun Raja Mohar Raja Badiozaman advised at Danaharta: to work diligently and with integrity. Moreover, he emphasized that we should keep proper records of deliberations and decisions made, as he mentioned that once we are all gone, only the records remain. To him, these records would eventually be the only things available to stand up to the scrutiny of third parties. No doubt that many should be named for their contribution during that time, but the special mention is made only of Tun Mohar because he was an immense pillar of integrity and reason during the darkest days of the Asian financial crisis.

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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The debate and proposals currently under discussion in Europe regarding austerity, Euro bonds, easing of interest rates and other choices of economic direction to resolve the problem are akin to debates in Malaysia during the Asian Financial Crisis. Further, similar to Europe today, the Asian Financial Crisis saw the advent of proponents for tough austerity measures as some wished to punish countries for errors in economic management.

Malaysia: A Buildup to Crisis

In the prelude to the Asian Crisis the Malaysian economy enjoyed a period of high growth, huge capital inflows, runaway stock market, credit expansion and a property boom. However, the economy faced a large current account deficit exacerbated by fixed exchange regime and exponential credit growth for banks and corporations that had over extended themselves due to lax lending standards and even, at times, fraudulent lending. In 1997, devaluation of the Thai Baht sparked a crisis and soon the contagion effect was felt in Malaysia. Initially, many errors were committed in response to the crisis: Malaysia defended the Ringgit, resulting in increased interest rates; inevitable capital flight dried up liquidity; and credit tightening forced severe economic contraction.

Like the current European outlook, there was anticipation in Asia for long-term decline and bleak prospects of economic growth. In fact in 1998 senior most government officials  were  concerned about Malaysia being afflicted by a Latin American styled economic crisis which would marginalize youths from employment and participation in society. Thus, unlike Korea and Thailand, which had implemented IMF advised measures, the Malaysian government opted not to implement harsh austerity measures which it felt would unduly hurt the general population.

The Malaysian Response to 1997/98 Crisis

First, at the time of the crisis, Malaysia ensured that political stability was maintained. Despite the highly publicized sacking and arrest of the then Deputy Prime Minister and its ensuing demonstrations, the political situation in Malaysia remained stable (contrary to the images shown by the international press that sensationalized protests). With political stability intact, the single most important ingredient to recovery and economic growth was firmly in place. Further, the Government ensured the continuation of safety nets to support the weakest members of society, such as subsidies and welfare payments. Despite early rhetoric to the contrary, the Government pursued sensible fiscal prudence, for example, delaying the huge hydro-electric dam in Bakun and shelving several high-profile commercial development projects.

In line with maintaining political stability, the Government had to stabilize critical components of the economy by addressing the wildly fluctuating exchange rate and the untenable interest costs. In 1998, the Government pegged the Ringgit and introduced capital controls to stem the flight of capital which had completely disrupted the economy.  Though in the short term inflation was high due to high import costs, eventually prices stabilized and the low interest rate regime did not affect the price of goods as demand had collapsed. Gradually, demand for goods and services increased in a more favorable interest rate climate.

Internal demand, which had in large part ushered in the crisis by fueling a property bubble and Government spending, was replaced by strong export growth. A depreciated currency also ensured imports were curtailed.  Commodity prices denominated in United States Dollars resulted in booms for Malaysian companies operating at Ringgit costs.  Further, with political stability, the tourism industry also contributed to exchange earnings. An unexpected spin-off resulting from import substitution was the growth in private higher education institutions to provide education for those who could no longer afford to go to the UK,US, Australia and Canada to pursue higher learning. It would be hard to imagine in Malaysia that repositioning of industries by wage adjustment and efficiency gains such as the suggested solution in the Eurozone today, could have built up demand for products and services so rapidly.  This is because labour is simply not as mobile as capital to create substantial economic adjustment in the short term.

The health of the banking system and credit for productive purposes which had been severely affected by the crisis was addressed by comprehensive measures. Three institutions were set up within 12 months to implement these measures (Danaharta, Danamodaland CDRC) and emergency legislation was passed to allow these institutions to work effectively. The objective of these institutions was to ensure recapitalization of banks and the removal of Non-Performing Loans, effectively enabling banks to get back to the business of lending. Further, financial restructuring of companies facilitated viable companies to return to the economic fold and contribute to demand and economic growth, whilst foreclosed assets bought by investors and put back to economic use also drove growth. Effective techniques were employed to clear and hold properties where there was clear justification, that is to say where they could be either developed or used to achieve commensurate rental yield. Not only did these measures encourage return of activity to the property sector; they also stemmed the outright collapse of property prices.

These measures – property sales (by Danahartavia), extensive promotion, and setting benchmark prices – resuscitated the collapsed property market. Although there are pockets of properties that remain abandoned till today, the numbers are insignificant.

Malaysia recovered unscathed by the Asian crisis and according to some estimates; the cost of the initiatives taken by the Government to recapitalize banks and write off bad loans was no more than 4% of GDP. Today, the economy grows steadily, albeit no longer at the near double digit growth observed during the pre-crisis period. (This is not to ignore Malaysia’s challenges today; there is concern about rising domestic debt and Government budget deficit, as well as fear of being caught in the middle income trap, but these are beyond the scope of this article.)

What Europe Can Learn

Though in some respects it is difficult to compare Europe and Malaysia, there are fundamental lessons to be learned. Like Europe, Malaysia had legacy economic issues at the time of the crisis: a current account deficit, an over extended property sector, crony capitalism, protected industries, etc. However, Malaysia opted for measures to restore demand before addressing legacy problems. This ensured clarity of direction and purpose of initiatives undertaken to restore the economy. Improved corporate governance and long-run fiscal discipline are important in the long run, but as the Asian crisis shows they do not restore demand in the short-term.

It takes bold and visionary leadership to make courageous decisions during crisis that take a country back on the road to recovery. Europe must recognize that the demand collapse is the most pressing issue and should set priorities accordingly.

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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