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Asian Financial Crisis: Impact on Malaysia Case Solution


  1. How and why got Malaysia affected by the Asian crisis?

Financial Crises origin

The Asian currency crises or financial crises started from Thailand, when the government purchased $4 billion in real estate developer’s debt. Symptoms continued to appear as the several major Korean and Thai companies collapsed.Furthermore, the situation worsened when one of the finance companies in Thailand did not meet its obligations to the foreign debt. Therefore, investors observed that the banks were overexposed to the real estate market, and this caused property prices to decrease, and lending to be ceased. On the other hand, the capital flight or capital outflow started in the country. This had an intense pressure on the regional currencies, created financial distress within the region, and stock exchange market also declined due capital outflow in the market, and devaluation of the currencies exchange rates.(Comin & Abraham, 2011)

Economy of the Malaysia

The Malaysian economy was growing at a steadyrate during the period of 1990-1997. It was a trading company, whichinfluenced the trade with other countries, thus import and export played major role in the to stimulate the economy. It was open to trade, and offered many benefits to the foreign investors to attract the foreign investment in the country. Hence, Malaysia was continuously growing economically, and it focused on the domestic savings to sustain the high investment rates to bring forward growth. Consequently, the country has high growth in terms of the local and foreign investments which further fueled the capital investment in the country through stock market, and banks as well.(Lim & Goh, 2012)

Impact on the Malaysia

The Asian countries have been attractive places for investment due to their high economic growth, and in Malaysia, the government plays a major role in bringing economic growth in the country through macroeconomic policies, like it influenced foreign investors, and provided relief, and free trade agreements, sustained currency rates, through investing in capital infrastructure, and electricity generation. However,the financial crisis approached Malaysia due to its exposure to unpredictable economic growth, and over-valued exchange rates, and stocks rates as well. Consequently, currency exchange rates lost the value, created uncertainty in the market, and caused devaluation of the assets in the country. Therefore, the capital flight from the country started, which further devalued the currency and stock.(Zakaria, et al., 2010)

Beyond the internal conditions of the Malaysia, the region was also suffering from a major economic distress. Therefore, the economic growth slowed, which created uncertainty. Similarly, the nonperforming loans were increasing in the country, which created further deep concerns in the among the investors. Thus, the Malaysian economy was largely hit by the speculative attracts, risk management, corporate governance, stock markets, and legal structure of the country. The speculative attacks mean the country’s currency rate devalued as compared to the market. However, this devaluation might be a result of the overvaluation of the currency during the high economic growth in which the capital inflows were high, and the country was growing a high rate.


Impact on the economy

The Malaysian economy was an import-export based economy, therefore during the crisis, currency exchange rate washighly beaten by the conditions. Thus, it decreased the exports of the country, due to low exchange rate in the forex a result, companies could not generate the revenues, and they were more exposed to the risk of default. On the other hand, the private investment also decreased due to lack of confidence over the domestic economy. Furthermore, many businesses had filed for bankruptcy during the crisis.Apart from that, stock market came down by 50%, and assets prices also face devaluation by 40%, and currency also depreciated by 31.4%. Due to this, the country was facing a major economic setback due the regional economic conditions, and internal economic policies, which could be set to avoid the financial stress in the country.(Shahab uddin & Ahsan, 2014)


Moreover, the indebtedness in the country increased significantly, which caused many organizations to go insolvent, and unable to pay back the debt, or meet the banks obligations. This was a result of the declining currency rates, and increasing interest rates in the country, whichled to high unemployment rate, and low wages to employed peoples. Similarly, the government also announced no increment to salaries of employed, even it also announced to deduct 10% from the salaries of the ministers, and 5% from the salaries of the civil servants of the state. Thus, overall domestic consumption also decreased. On the other hand, export has already been decreasing due to currency rates decline. Similarly, the government has been involved in promoting the investment in the country, but it has not set limitations, and more detailed guidelines might have helped Malaysia to avoid the such economic distress in the country.(Shahab uddin & Ahsan, 2014)............................

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