ASIAN FINANCIAL CRISIS OF 1997-98 IN MALAYSIA
Between June 1997 and January 1998 a financial crisis engulfed some of the fast-growing countries economies of Asia — Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea — and sent their economies crashing like a shower of meteors. Starting with Thailand, the currency, stock markets and per capita incomes of these countries plummeted one by one.
Southeast Asian financial markets experienced a sudden and severe decline in 1997 when investors lost confidence in several Asian currencies and securities. This crisis originated from heavy international currency speculation, which led to major slumps in exchange rates. It began with the Thai baht in May 1997 and spread rapidly throughout East and Southeast Asia, severely affecting the banking and finance sectors. There was a significant outflow of foreign capital. To counter the crisis, the International Monetary Fund (IMF) recommended changes to fiscal and monetary policies, including austerity measures. Some countries, such as Thailand, South Korea, and Indonesia, reluctantly adopted these changes. [Source: John H. Drabble, University of Sydney, Australia +]
Before the crisis ended 1.1 million Thais fell below the poverty line, and the perplexed and humiliated leader of South Korea left office before his term was up. In Indonesia the rupiah plunged by 86 per cent against the US dollar and 19 million people fell below the poverty line. President Suharto was forced to step down in May 1998, and Jakarta exploded in violence, leaving about 1,200 people dead and 5,000 buildings burnt.
Asian Financial Crisis in 1997-98 on Malaysia
During Asian Financial Crisis in 1997-98, the stock market in Malaysia crashed 75 percent and the currency plummeted 40 percent to a 24 year low. The Malaysian ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar by January 1998. One billion dollars in foreign reserves were blown trying to prop up the currency.
The Asian economic crisis of 1997 led to the first downturn in the economy in a 13-year span. Ethnic Chinese tycoons were hit hard by the Asian financial crisis. Many remained technically bankrupt for years afterwards.
One of the causes of the crisis in Malaysia was that it had a high current-account deficits (when imports exceed exports), which made it a target for currency speculators. The deficit was partly caused by money poured into infrastructure projects. Growth was spurred by government spending and tax breaks than efficiency.
Overall Malaysia wasn't in as bad of shape as Thailand before the crisis and after. In Malaysia, the corruption wasn't so bad, banks and companies were not as indebted as their Thai and Indonesian counterparts, and investment money wasn’t wasted on frivolous real estate developments like it was in Thailand (instead it was poured into expensive public works projects).
Malaysia’s Response to the Asian Financial Crisis in 1997-98,
Like several of its neighbors, Malaysia suffered a recession in 1997–98; however, unlike those that accepted financial aid from the International Monetary Fund, Malaysia took matters into its own hands. In Sept., 1998, it discontinued trading in its currency and imposed sweeping controls on its capital markets, particularly on investment from overseas; by mid-1999, the economy had begun to recover, though economic growth was slower compared to previous years. [Source: Columbia Encyclopedia, 6th ed., Columbia University Press]
The Malaysian government refused and implemented independent measures; the ringgitbecame non-convertible externally and was pegged at RM 3.80 to the US dollar, while foreign capital repatriated before staying at least twelve months was subject to substantial levies. Despite international criticism these actions stabilized the domestic situation quite effectively, restoring net growth especially compared to neighboring Indonesia.
The economy began to recover by the end of 1998 and in August 1999 the government officially announced that the recession was over. The economy began to recover by the end of 1998 and the government officially announced that the recession was over by August 1999.
Impact of the Asian Financial Crisis in 1997-98 on Malaysia
While impact on Malaysia was less significant than on other Asian countries, the economic decline forced the government to scale back or postpone several prominent infrastructure projects. [Source: Worldmark Encyclopedia of Nations, Thomson Gale, 2007]
The 1997 Asian financial crisis triggered both economic and political upheaval. By early 1998, the country experienced its first economic downturn in 13 years, sparking a clash between Prime Minister Mahathir, who favored economic isolation, and Deputy Prime Minister Anwar Ibrahim, who supported open-market policies.
In September 1998, Mahathir dismissed Anwar from his cabinet and party posts and imposed currency controls. When Anwar protested publicly and mobilized opposition, he was arrested and later tried for corruption and sexual misconduct. In 1999, he was sentenced to six years in prison, while his wife, Wan Azizah, launched the opposition party Keadilan (Justice) to contest the national elections.
Mahathir Statements on Speculators and Globalization
At an World bank-IMF meeting in Hong Kong after the Asian Financial Crisis in 1997-98 began, Mahanthir said that Western banks had developed a conspiracy to knock off Malaysia as a competitor. Mahanthir called the currency speculators Jews, "neo-colonialists," "racists," "international criminals," "wild beats" and unidentified "sinister force." he then added, "They should be shot." He then said that "currency trading is unnecessary, unproductive and immoral."
When the Russian rubble tanked after foreign currency poured out of that country Mahathir said, if currency speculators continued to attack Russia “they may want to drop the bombs on those who attack them.” In 2001, he said, “There are so many corporate giants hiding their teeth and intent on gobbling us up...The second great Asian colonialism is upon us.”
Mahathir said "people who are in control of the media and in control of the big money seem to want to see this Southeast Asia countries in particular Malaysia stop trying to catch up with their superiors and to know their place." He also said, "We are Muslims, and the Jews are not happy to see Muslims progress...We may suspect them of having an agenda, but we do not want to accuse them."
Mahathir called financier George Soros "a moron" even though he was buying not selling Malaysian currency at the time of the crisis. Soros responded by called Mahathir "a menace to his own country" and a "loose cannon" who should not be taken seriously. There had been bad blood between Soros and Malaysia for some time. Malaysia's central bank, the Bank Negara, was burned when Soros made his $1 billion profit by speculating on the British pound in 1992. The Malaysian bank had backed the pound and ended up losing $5.73 billion during a two year period around 1992.
Mahathir's Policies During the Asian Financial Crisis in 1997-98
Malaysia didn't seek IMF help like Thailand, South Korea and Indonesia and didn’t have the massive foreign debt that these countries has either. Instead it tried to revive the economy through domestic policies such as lowing interest rates and government spending, reducing corporate and bank debts, and enacting legislation that reduced the power that foreign investors could have the Malaysian economy.
Mahathir encouraged Malaysians to "Buy Malaysia," and helped put together "Love Malaysia" trade exhibits. He told students studying abroad to come home, discouraged companies from hiring foreign workers and told rich families to send their foreign servants home. Malaysians were even urged not eat one of their favorite snacks, curry puffs, because they were made with Australian beef.
Mahathir imposed capital controls and tried to restrict the activities of speculators. The government imposed sweeping controls of the capital markets, passing legislation that made it more difficult to take ringgits out of the country. It pegged the ringgit against the dollar at a fixed rate, banned trading of the ringgit, and banned foreign capital from leaving the country for a year.
Mahathir also adopted isolationist and protective policies to protect Malaysian industry and relaxed some rules to help ailing companies stay afloat. He also made strong statements, implying that if his policies were not followed Malaysia risked breaking apart and collapsing into ethnic riots.
The capital controls were made largely after the foreign capital had already left and the currency had fallen and thus had little impact. Over $7 billion of taxpayers money was spent to liquidate nonperforming loans and bail out ailing banks. Malaysia's isolationist policies initially stymied its recovery. When Mahathir banned some trading practices, investors fled taking their money with them. When he set up special share-buying funds, people only sold into it and the stock market crashed 21 percent in 10 days. But in the end Malaysia recovered pretty quickly. Things started to pick up after the capital controls were relaxed and infrastructure projects were cut to save money. The market responded and jumped 12.4 percent in a single day.
Effects of the Asian Financial Crisis in 1997-98 in Malaysia
The downturn in Malaysia after the 1997-1998 Asian financial crisis was shorter and shallower than in other Asian countries. The economy shrunk by 6 percent in 1998 but started growing again after that. Malaysia’s bad loan problem was not as bad as some of its neighbors. Most of its $13 billion in bad loans was cleared up in four years Most of the loans were bought by the government at about 46 percent of their original value.
For a while banks couldn't give out loans. At the peak of the crisis in Malaysia bank credit equaled 160 percent of GDP; Debt collectors received more work than they could handle and number of Mercedes sold in Malaysia dropped 60 percent. Malaysia was forced to delay its ambitious construction plans, stretching out loan payments to banks on the airport and other infrastructure projects.
The 1997 economic crisis resulted in a reduction of pollution as people drove less, car sales plummeted, factories reduced their output or were closed, construction ceased and development projects were scrapped. Spending on the environment fell from 67 cents per person to 53 cents.
Recovery After the Asian Economic Crisis
The Malaysian economy contracted by nearly 7 percent in 1998. By 1999, the economy had rebounded. Growth was 5 percent that year. In 2000, growth was 8 percent, unemployment was 3.2 percent, and inflation was 1.8 percent. Growth slipped again to under 1 percent in 2001 but stabilized at between 4 and 5 percent growth in 2002-04. In 2003, growth was 4.5 percent, second in Southeast Asia to Thailand. The recovery was driven by exports an the use of government funds to prop up ailing companies and finance employment-providing infrastructure projects.
Since the 1997 Asian Financial Crisis, Malaysia has enjoyed an average real GDP growth rate of 5.6 percent. As an export-oriented economy, the country’s major exports in 2007 were electronics, electrical machinery, chemical products, palm oil and crude oil. Its top five trading partners are the U.S., Singapore, Japan, China and Thailand. In addition to exports, Malaysia’s economy also has strong manufacturing, services and tourism industries.
Mahathir trumpeted the recovery as a sign that his economic policies were working. Some economists disagreed, saying the recovery had little to do with controls and in fact occurred in spite of them. Whatever the case, th ability of Malaysia to weather the crisis gave it more confidence. Still some economists felt that Malaysia could have rebounded even more strongly. Foreign investors were still reluctant to invest in Malaysia out of fear that capital controls might be imposed again
In July 2005, Malaysia scrapped the ringgit’s peg to the dollar which had been in place since 1998.
Image Sources: Wikimedia Commons
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Malaysia Tourism Promotion Board, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.
Last updated January 2026