This paper discusses how Malaysia can better protect itself from future shocks and avoid another crisis while it seeks to regain its position as one of the fastest growing economies in the world. To these ends, its strategy should include continued structural reforms to achieve healthy balance sheets of the banking and corporate sectors; further deregulation to promote competition and efficiency; and consistent macroeconomic policies to maintain financial stability and sustainable fiscal and external positions. Malaysia's economic structure and performance were relatively strong prior to the crisis. Malaysia’s initial low level of short-term external debt enabled it to maintain foreign reserves at a reasonably high level, and this contributed to relatively robust external and domestic confidence early on in the crisis. As a consequence of financial vigilance exercised through prudential regulation of capital movements, the exposure of the financial and corporate systems was contained. Stock market capitalization in Malaysia grew to an extremely high level prior to the crisis, reflecting both the fast expansion of the capital market and liberal capital account regime.

© 2001 International Monetary Fund

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Figures: Theodore F. Peters, Jr.

Typesetting: Alicia Etchebarne-Bourdin

Cataloging-in-Publication Data

Malaysia: from crisis to recovery/Kanitta Meesook…[et al.]—Washington.

D.C.: International Monetary Fund, 2001.

p. cm.. —(Occasional paper, ISSN 0251-6365; no. 207)

Includes bibliographical references.

ISBN 9781589060470

1. Malaysia—Economic policy. 2. Malaysia—Economic conditions. 3. Fiscal policy—Malaysia. 4. Finance—Malaysia. I. Kanitta Meesook. II. International Monetary Fund. III. Occasional paper (International Monetary Fund); no. 207

HC445.5.M36 2001

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  • Preface

  • I Overview

  • Olin Liu

  • II Comparative Review of Policies and Performance, 1997–2000

  • Kanitta Meesook

    • Initial Conditions and Economic Structure

    • Policy Responses and Performance

    • Time Frame of Malaysia’s Response to the Crisis

    • Appendix. Graphical Overview of Indicators During Precrisis, Crisis, and Recovery

  • III Potential Output and Inflation

  • II Houng Lee and Yougesh Khatri

    • Introduction

    • Measuring Potential Output

    • Estimating the Output Gap

    • Determinants of Inflation

    • Appendix. Approaches to Measuring Potential Output

    • References

  • IV Challenges to Fiscal Management

  • Olin Liu

    • Introduction and Recent Developments

    • Fiscal Policy Rules and Recent Experience

    • Enhancing Fiscal Policy Responsiveness to Business Cycles

    • Conclusions

    • Appendix I. Off-Budget and Quasi-Fiscal Operations

    • Appendix II. Fiscal Measurement: Methodology Note

    • References

  • V Capital Controls in Response to the Asian Crisis

  • Natalia Tamirisa

    • Background

    • Design and Enforcement of Capital Controls

    • Capital Controls and Economic Performance

    • Policy Considerations

    • Appendix. A Preliminary Empirical Analysis of Malaysia’s Capital Controls

    • References

  • VI Financial Sector Issues

  • Mark H. Krysl and Michael Moore

    • Background

    • Recent Financial Sector Performance

    • Financial Sector Restructuring: Comparative Perspective

    • Toward a More Resilient Banking Sector

  • VII Corporate Performance and Reform

  • Yougesh Khatri

    • Key Features of the Corporate Sector

    • Corporate Sector and Financial Crises

    • Corporate Performance

    • Progress with Corporate Reforms

    • Summary and Conclusions

    • References

  • Boxes

    • 4.1 Fiscal Policy in Malaysia, 1997–2000

    • 4.2 Fiscal Policy Responses to the Business Cycle

    • 5.1 Singapore: Reconciling Policy on the Internationalization of the Singapore Dollar and Financial Development Objectives

    • 5.2 Korea: Gradual Liberalization with a Focus on Control of Won Lending to Nonresidents

    • 5.3 Thailand: Relatively Liberal Policy in Normal Times, Temporary Capital Controls to Limit Currency Speculation

    • 5.4 Japan: Toward the Internationalization of the Yen

    • 6.1 Danaharta: Asset Management and Recovery

    • 6.2 Danamodal: Bank Recapitalization

    • 6.3 Corporate Debt Restructuring Committee

    • 7.1 The Insider and Outsider Systems of Corporate Governance

  • Figures

    • 2.1 Exchange Rate Developments

    • 2.2 Bank Lending

    • 2.3 Domestic Investment in Selected Asian Countries

    • 2.4 Investment and Real GDP Growth

    • 2.5 Market Capitalization in Selected Asian Countries

    • 2.6 Private Sector Credit in Selected Asian Countries

    • 2.7 Cumulative and Net Portfolio Flows

    • 3.1 Comparing Estimates of Output Gap With (Adj. SP) and Without (SP) the Interpolated Point in 1998

    • 3.2 Inflation, 1992–2001

    • 3.3 Inflation, 1995–2001

    • 4.1 Fiscal Indicators

    • 4.2 Fiscal Budget and Actual Balance

    • 5.1 The Evolution of Capital Controls

    • 5.2 Sovereign Bond Spreads of Selected Asian Countries

    • 5.3 Net Portfolio Flows

    • 5.4 Volume of Interbank Spot and Swap Transactions in Kuala Lumpur Foreign Exchange Market

    • 5.5 Selected Asian Countries: Stock Market Composite Indices

    • 5.6 Average Daily Trading Volume at the KLOFFE and the COMMEX

    • 5.7 Capital Controls

    • 7.1 Selected Asian Countries: Capital Market Overview

    • 7.2 Malaysian Corporate Sector: Total Assets and Expenditures Relative to Total Revenue

    • 7.3 Indices of Efficiency, Exogenous Change, and TFP

    • 7.4 Malaysian Corporate Sector: Performance Indicators

  • Appendix Figures

    • A.2.1 Selected Asian Countries: Precrisis Macroeconomic Indicators

    • A.2.2 Selected Asian Countries: Precrisis Financial Indicators

    • A.2.3 Selected Asian Countries: Economic Indicators During the Crisis Period

    • A.2.4 Selected Asian Countries: Economic Developments

    • A.2.5 Selected Asian Countries: Financial Market Indicators During the Crisis Period

    • A.2.6 Selected Asian Countries: Economic Performance During the Recovery Stage

    • A.2.7 Selected Asian Countries: Financial Indicators During the Recovery Stage

    • A.2.8 Selected Asian Countries: Fiscal Indicators

    • A.2.9 Selected Asian Countries: Monetary Indicators

  • Tables

    • 2.1 Asian Crisis Countries: Selected Structural Indicators, 1996–2000

    • 2.2 Major Economic Policy Measures During Emergence of Crisis and Early Stage of Contagion

    • 2.3 Major Economic Policy Measures, Initial Policy Responses, and Continued Turmoil

    • 2.4 Major Economic Policy Measures, Exchange and Capital Controls, and Aftermath

    • 3.1 Estimates of Output Gap, 1996–2001

    • 3.2 F and SC Statistics for Sequential Reduction from VAR(4) to VAR(1)

    • 3.3 Cointegration Analysis of Price Data, 1991Q2 to 2000Q1

    • 3.4 Result of Inflation Estimation by OLS, 1992Q2–1999Q4

    • 4.1 Quasi-Fiscal Contingent Liabilities

    • 5.1 Key Changes in Capital Account Regulations

    • 5.2 Sovereign Credit Ratings

    • 5.3 Net Foreign Direct Investment in Selected Asian Countries

    • 5.4 A Summary of Investment Regulations for Entry into and Exit from Selected Markets, end-1998

    • 5.5 Taxation of Capital Gains on Portfolio Investment in Selected Emerging Markets, 1999

    • 5.6 A Summary of Controls on the International Use of Domestic Currency, end-1998

    • 5.7 Data

    • 5.8 Unit Root Tests

    • 5.9 A Cointegration Analysis

    • 5.10 A Conditional Error Correction Model of Portfolio Investment

    • 6.1 The Banking System (Depository Financial Institutions)

    • 6.2 The Trend in Nonperforming Loans

    • 6.3 Asset Quality Indicators

    • 6.4 Financial Sector Restructuring in Malaysia, Korea, and Thailand

    • 6.5 Selected Financial Indicators of the Asian Crisis Countries

    • 6.6 Changes in Prudential Standards in Malaysia, Korea, and Thailand

    • 6.7 Proposed Banking Groups

    • 6.8 Steps to Improve Prudential Supervision and Regulation in Malaysia, Korea, and Thailand

    • 7.1 A Comparison of Legal Protection, Accounting Standards, Institutions, and Enforcement in Various Countries

    • 7.2 Financial Ratios for Listed Nonfinancial Companies in Malaysia

    • 7.3 Operational Performance of Publicly Traded Corporations and Share of Distressed Corporations in Selected Asian Countries

    • 7.4 Debt/Equity Ratios in Selected Economies

    • 7.5 A Comparison of Stock Market Returns and Risk in Selected Economies

The following symbols have been used throughout this paper:

  • … to indicate that data are not available:

  • — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

  • – between years or months (e.g., 1998–99 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years (e.g., 1998/99) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but forwhich statistical data are maintained and provided internationally on a separate and independent basis.


This occasional paper draws on staff background studies prepared for the 2000 and 2001 consultations between the International Monetary Fund and Malaysia. The paper takes stock of economic developments since the crisis and investigates various aspects of economic performance, policy, and reform that contributed to the strong recovery. The individual studies include the estimation of potential output and the implications for inflation; fiscal policy and key challenges for fiscal management; capital controls, their effects, and medium-term policy considerations; and performance and reform in the financial and corporate sectors.

The paper is the product of a team effort led by Kanitta Meesook. The team of authors comprised II Houng Lee, Olin Liu, Yougesh Khatri, Natalia Tamirisa, Michael Moore, and Mark Krysl. Also central to the production of this paper was the research assistance of Janice Lee, and the coordination and assistance of Margaret Tan and Lisa Vassou.

The authors would like to thank the Malaysian authorities for their excellent cooperation and support during policy discussions and technical meetings, and for the extensive provision of data and background materials. The authors would also like to thank—without implication—Kalpana Kochhar for reviewing drafts of the entire paper at an early stage. Mark O’Brien for reviewing Section VI, and Jenifer Piesse for contributing to the empirical work in Section VII. The authors are also indebted to the External Relations Department and to Gail Berre who edited the paper and coordinated its production and publication.

The opinions expressed are solely those of the authors and do not necessarily reflect the views of the International Monetary Fund, the Executive Directors, or the Malaysian authorities.

Except where otherwise indicated, the paper reflects information available through end-2000.

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