Revisit of financial crisis? Not that we can see — Tay Tian Yan

AUG 20 — A friend of mine, who is usually calm, suddenly went panic when the ringgit fell to 4.10.

“Is it going to be a crisis soon? The last time we saw the same drastic plunge was when we had the regional financial crisis!”

During the 1997/98 regional financial crisis, the local unit plummeted from 2.5 to the dollar to 4.88. That nevertheless was not the only bad news, but the precursor for more serious things to come.

What happened next was the diving stock market which saw the market capitalization slashed by more than half As if that was not enough, interest rate soared to over 10 per cent, inflationary pressure was smothering, retrenchments were ubiquitous, unemployment rate was high and the liquidity crunch sent the market to despair.

All these might not sound too familiar to many today. But back in those years when many lost their jobs, their hard earned savings, auctioned homes and factories, the agony could not have been more real.

It is therefore inevitable that the recent free fall of ringgit has reawakened the painful memories of yesteryear, as many began to worry whether the bad old days would stage a comeback anytime soon.

Worryingly the dramatic drop of ringgit today bears some resemblance to the situation back in 1997/98, but fortunately, the movements of other economic parameters today remain vastly different from those in 1997/98, with the only exception of the sliding ringgit.

In other words, save for the currency, we have so far not spotted any other signs of past crisis where other economic aspects are concerned.

I tried to source some information for a clue into what actually caused the crisis back then.

The crisis started with the rapid depreciation of the ringgit before it spread to all other economic aspects.

The fall of ringgit was not caused singlehandedly by George Soros as Mahathir used to claim. The actual causes were the country’s unhealthy financial system back then, the artificially inflated economy and severe bubbling of the real estate sector.

The industrialization of 1990s gave rise to a decade of unprecedented rapid economic growth. Businesses were bursting with confidence and began to borrow uncontrollably. Meanwhile, funds throng into the capital market, making it very easy for businesses to get a loan.

Into the mid 1990s, while the market remained prosperous, there were signs of overborrowing, rapidly rising debt levels and widening current account deficits. The ringgit was overpriced, the stock market was teeming with speculative activities, and the economic bubble was stretching towards the breaking point.

But PM Mahathir was still illusioned by the prosperity that lay before his eyes, fantasizing that the phenomenal growth could be sustained forever.

He rejected the experts’ proposal to raise the interest rate to cool down the overheated economy, as he pressed on with his high growth agenda, never to let the party stop.

But even good times have to come to a halt. Thailand was the first to back down, followed soon by South Korea and Indonesia before Malaysia came under.

Ringgit suffered a humiliating defeat as it came under tremendous selling pressure. Funds were frantically withdrawn from the Malaysian market, sending the local bourse tumbling, banks on the verge of collapse and companies winding up for good.

Later Mahathir’s capital control policy was widely touted as the savior of the Malaysian economy but few would question his blind pursuit of economic growth on the basis of lax financial management and discipline.

Today, the drastic fall of ringgit could be attributed to the excessive strength of the US dollar as the Fed is prepared to raise the interest rate, resulting in the frantic acquisition of the dollar in global monetary markets.

Ringgit is not the hardest hit currency. The Russian, Brazilian, Indonesian and Australian currencies have performed worse. Any country that thrives on commodity and oil exports will not be spared.

Our fiscal deficits and debt levels are at significantly more comfortable positions than nearly two decades ago while no obvious economic bubble has yet to present itself. Our current account balance, economic growth and unemployment rates are still reasonably healthy and manageable.

But of course, political turmoil still presents some risks and dangers, but that is beyond our scope of discussion here.

In short, it is unlikely for the crisis to recur although we should not be excessively complacent and optimistic, having picked up some lessons from the past crisis.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.

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