Malaysia and the Asian Financial Crisis: A View from the Finance Perspective
University of Manchester - Manchester Business School
Lancaster University Management School, Accounting and Finance Working Paper No. 99016
In early 1997, the Malaysian stock market index began a downward spiral together with stock markets of several ASEAN countries. On 14 July 1997, Bank Negara of Malaysia gave up the defence of the Malaysian ringgit after jacking up the short rate to 50% and spending US$10 billions on unsuccessful monetary operations. Two years on, much has happened and the Asian crisis appears to be history. However, in many respects, the Asian crisis has had a much greater and more averse impact on Malaysia than the world market crash in October 1987.
This paper analyses the Malaysian share of the 1997 Asian crisis. The Malaysian stock market, often classified as an emerging or developing stock market together with the other Asian markets, is shown to possess characteristics distinct from the developed stock markets in the US and the UK. A strong contagion effect in the region was present although it is debatable if it was due to investor herding behavior or the interrelated cross border trades. There is no evidence that many useful techniques, such as diversification across time, stripping dividends and hedging, have been implemented in the Malaysian context.
The Malaysian government has managed the crisis well under the circumstances. In some respects, South Africa has many features similar to those of Malaysia; the close tie with the neighbouring countries, the internal racial conflict, the rich natural resources and the potential for strong growths. There are many useful lessons to be learnt from the experience in Malaysia.
Number of Pages in PDF File: 17
JEL Classification: C4, G1
Date posted: November 8, 1999