1. 0INTRODUCTION The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world.
The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns. The financial crisis has been linked to reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States. The US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.
The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance. 2. FINANCIAL CRISIS The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Many economists have offered theories about how financial crises develop and how they could be prevented.
There is little consensus, however, and financial crises are still a regular occurrence around the world. 2. 1TYPES OF FINANCIAL CRISIS 2. 1. 1Banking Crisis When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance.
A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch. In this way, the banks become an accelerator of a financial crisis. Examples of bank runs include the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 has also sometimes been called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. 2. 1. 2Speculative Bubbles and Crashes
Economists say that a financial asset stock, for example exhibits a bubble when its price exceeds the present value of the future income such as interest or dividends that would be received by owning it to maturity. If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall.
However, it is difficult to tell in practice whether an asset’s price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur. Well-known examples of bubbles or purported bubbles and crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001, and the now-deflating United States housing bubble. 2. 1. 3International Financial Crises
When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.
Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds. 2. 1. 4Wider economic crises Negative GDP growth lasting two or more quarters is called a recession. An especially prolonged recession may be called a depression, while a long eriod of slow but not necessarily negative growth is sometimes called economic stagnation. Since these phenomena affect much more than the financial system, they are not usually considered financial crises per se. But some economists have argued that many recessions have been caused in large part by financial crises. One important example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The sub prime mortgage crisis and the bursting of other real estate bubbles around the world has led to recession in the U. S. and a number of other countries in late 2008 and 2009.
Nonetheless, some economists argue that financial crises are caused by recessions instead of the other way around. Also, even if a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, and Ben Bernanke has acknowledged that he agrees. . 0BACKGROUND AND CAUSES The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006. High default rates on “subprime” and adjustable rate mortgages (ARM) began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms.
However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U. S. , refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. [pic]Share in GDP of U. S. financial sector since 1860. In the years leading up to the start of the crisis in 2007, significant amounts of foreign money flowed into the U. S. from fast-growing economies in Asia and oil-producing countries.
This inflow of funds made it easier for the Federal Reserve to keep interest rates in the United States too low by the Taylor rule from 2002–2006 which contributed to easy credit conditions, leading to the United States housing bubble. Loans of various types foe example mortgage, credit card, and auto were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased.
Such financial innovation enabled institutions and investors around the world to invest in the U. S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U. S. continues to drain wealth from consumers and erodes the financial strength of banking institutions.
Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U. S. dollars globally. While the housing and credit bubbles built, a series of factors caused the financial system to both expand and become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system.
Some experts believe these institutions had become as important as commercial depository banks in providing credit to the U. S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity.
Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments. 4. EFFECTS ON THE GLOBAL ECONOMY 1. Global Effects A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse.
The continuing development of the crisis prompted fears of a global economic collapse. The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years. Three days later UBS economists announced that the “beginning of the end” of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers.
The United Kingdom had started systemic injection, and the world’s central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms “the worst is still to come”. UBS quantified their expected recession durations on October 16: the Eurozone’s would last two quarters, the United States’ would last three quarters, and the United Kingdom’s would last four quarters. The economic crisis in Iceland involved all three of the country’s major banks.
Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history. At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the Reagan recession of 1981 and 1982 with negative 2009 growth for the U. S. , Eurozone, UK and Canada; very limited recovery in 2010; but not as bad as the Great Depression. The Brookings Institution reported in June 2009 that U. S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the U. S. consumer as a source of global demand. ” With a recession in the U. S. and the increased savings rate of U. S. consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14. 4% in Germany, 15. 2% in Japan, 7. 4% in the UK, 9. 8% in the Euro area and 21. 5% for Mexico. By March 2009, the Arab world had lost $3 trillion due to the crisis. In April 2009, unemployment in the Arab world is said to be a ‘time bomb’.
In May 2009, the United Nations reported a drop in foreign investment in Middle-Eastern economies due to a slower rise in demand for oil. In June 2009, the World Bank predicted a tough year for Arab states. In September 2009, Arab banks reported lost nearly to $4 billion since the global financial crisis onset. 4. 0. 2U. S. economic effects Real gross domestic product the output of goods and services produced by labor and property located in the United States decreased at an annual rate of approximately 6 percent in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods.
The U. S. unemployment rate increased to 9. 5% by June 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964. 4. 0. 3Official economic projections On November 3, 2008, the EU-commission at Brussels predicted for 2009 an extremely weak growth of GDP, by 0. 1 percent, for the countries of the Euro zone (France, Germany, Italy, etc. ) and even negative number for the UK (-1. 0 percent), Ireland and Spain.
On November 6, the IMF at Washington, D. C. , launched numbers predicting a worldwide recession by -0. 3 percent for 2009, averaged over the developed economies. On the same day, the Bank of England and the Central Bank for the Euro zone, respectively, reduced their interest rates from 4. 5 percent down to three percent, and from 3. 75 percent down to 3. 25 percent. Economically, mainly the car industry seems to be involved. As a consequence, starting from November 2008, several countries launched large “help packages” for their economies.
The U. S. Federal Reserve Open Market Committee release in June 2009 stated: “… the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.
Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. ” Economic projections from the Federal Reserve and Reserve Bank Presidents include a return to typical growth levels (GDP) of 2-3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation that remains at typical levels around 1-2% 5.
THE FINANCIAL CRISIS AND THE DEVELOPING WORLD For the developing world, the rise in food price as well as the knock-on effects from the financial instability and uncertainty in industrialized nations are having a compounding effect. High fuel costs, soaring commodity prices together with fears of global recession are worrying many developing country analysts. Summarizing a United Nations Conference on Trade and Development report, the Third World Network notes the impacts the crisis could have around the world, especially on developing countries that are dependent on commodities for import or export. Uncertainty and instability in international financial, currency and commodity markets, coupled with doubts about the direction of monetary policy in some major developed countries, are contributing to a gloomy outlook for the world economy and could present considerable risks for the developing world, the UN Conference on Trade and Development (UNCTAD). ” Commodity-dependent economies are exposed to considerable external shocks stemming from price booms and busts in international commodity markets. Market liberalization and privatization in the commodity sector have not resulted in greater stability of international commodity prices.
There is widespread dissatisfaction with the outcomes of unregulated financial and commodity markets, which fail to transmit reliable price signals for commodity producers. In recent years, the global economic policy environment seems to have become more favorable to fresh thinking about the need for multilateral actions against the negative impacts of large commodity price fluctuations on development and macroeconomic stability in the world economy. 5. 0. 1Asia and the financial crisis Countries in Asia are increasingly worried about what is happening in the West.
A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy, as that would have a knock-on effect of reassuring foreign investors and helping ease concerns in other parts of the world. Many believed Asia was sufficiently decoupled from the Western financial systems. Asia has not had a subprime mortgage crisis like many nations in the West have, for example. Many Asian nations have witnessed rapid growth and wealth creation in recent years. This lead to enormous investment in Western countries.
In addition, there was increased foreign investment in Asia, mostly from the West. However, this crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result, Asia has had more exposure to problems stemming from the West. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. Asian products and services are also global, and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest.
India and China are the among the world’s fastest growing nations and after Japan, are the largest economies in Asia. From 2007 to 2008 India’s economy grew by a whopping 9%. Much of it is fueled by its domestic market. However, even that has not been enough to shield it from the effect of the global financial crisis, and it is expected that in data will show that by March 2009 that India’s growth will have slowed quickly to 7. 1%. Although this is a very impressive growth figure even in good times, the speed at which it has dropped—the sharp slowdown—is what is concerning.
China, similarly has also experienced a sharp slowdown and its growth is expected to slow down to 8% (still a good growth figure in normal conditions). However, China also has a growing crisis of unrest over job losses. Both have poured billions into recovery packages. With China concerned about its economy, it has been trying to encourage its companies to invest more overseas, hoping it will reduce the upward pressure on its currency, the Yuan. China has also raised concerns about the world relying on mostly one foreign currency reserve, and called for the dollar to be replaced by a world reserve currency run by the IMF.
Of course, the US has defended the dollar as a global currency reserve, which is to be expected given it is one of its main sources of global economic dominance. Whether a change like this would actually happen remains to be seen, but it is likely the US and its allies will be very resistant to the idea. Japan, which has suffered its own crisis in the 1990s also faces trouble now. While their banks seem more secure compared to their Western counterparts, it is very dependent on exports. Japan is so exposed that in January alone, Japan’s industrial production fell by 10%, the biggest monthly drop since their records began.
Japan’s output for the first 3 months of 2009 plunged at its quickest pace since records began in 1955, mostly due to falling exports. A rise in industrial output in April was expected, but was positively more than initially estimated. However, with high unemployment and general lack of confidence, optimism for recovery has been dampened. Towards the end of October 2008, a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the global financial crisis.
However, as Inter Press Service (IPS) reported, this coordinated response is dependent on the entry of Asia’s emerging economies into global policy-setting institutions. This is very significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade, finance and investment talks. This time, however, Asian countries are potentially trying to flex their muscle, maybe because they see an opportunity in this crisis, which at the moment mostly affects the rich West.
Asian leaders had called for “effective and comprehensive reform of the international monetary and financial systems. ” For example, as IPS also noted in the same report, one of the Chinese state-controlled media outlets demanded that “We want the U. S. to give up its veto power at the International Monetary Fund and European countries to give up some more of their voting rights in order to make room for emerging and developing countries. ” They also added, “And we want America to lower its protectionist barriers allowing an easier access to its markets for Chinese and other developing countries’ goods. Whether this will happen is hard to know. Similar calls by other developing countries and civil society around the world, for years, have come to no avail. This time however, the financial crisis could mean the US is less influential than before. A side-story of the emerging Chinese superpower versus the declining US superpower will be interesting to watch. It would of course be too early to see China somehow using this opportunity to decimate the US, economically, as it has its own internal issues.
While the Western mainstream media has often hyped up a “threat” posed by a growing China, the World Bank’s chief economist (Lin Yifu, a well respected Chinese academic) notes “Relatively speaking, China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U. S. ” China has, however, used this opportunity to attempt to attract neighboring nations into its orbit by attempting to foster better economic ties.
According to an IPS analysis, this has been a goal for a while, but the recent financial crisis has provided more opportunities for China to step up to this. An improved investment deal between China and Taiwan maybe one example of this improving engagement in the region. The economic crisis may also be encouraging greater ties in this manner, as it would be important for Taiwan in particular (as it has been in recession since the end of 2008). Asian nations are mulling over the creation of an alternative Asia foreign exchange fund, but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit.
What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena, which would be good for other developing regions, too. 6. 0NEWS OR ISSUE IN GLOBAL FINANCIAL CRISIS IN MALAYSIA Malaysia’s 2009 economic prospects darken as exports continue to slide Kuala Lumpur, 26 March –Malaysia’s gross domestic product (GDP) growth rate is forecasted to drop to zero per cent as the global financial crisis evolves into a deepening subregional industrial crisis in Southeast Asia, according to the United Nations’ regional arm, the Economic and Social Commission for Asia and the Pacific (ESCAP).
In its annual Economic and Social Survey for Asia and the Pacific, ESCAP observes that the crisis has moved rapidly from its first stage of a financial crisis emanating from developed countries and causing contagion in Asia and the Pacific, to a second stage of crisis for the real economy in the region based on plummeting exports and curtailed domestic demand. Depressed growth in the region now threatens a third stage of crisis of contagion spreading from the real sector back to the financial sector, where any increase in non-performing loans will put added pressure on bank balance sheets.
Malaysia’s GDP grew at 4. 6 per cent in 2008 – down from 6. 3 per cent in 2007 – although record high prices of export commodities such as palm oil during the first half of the year eased the downfall. In the fourth quarter of 2008, GDP growth rate fell abruptly to 0. 1 per cent, reflecting both plunging commodity prices and the impact of the recession in the United States and other industrialized countries. The US dollar value of Malaysian exports contracted by 20. 1 per cent in December 2008 compared to the same month in 2007, and by 33. per cent in February 2009, darkening the outlook for this year. Data from the first few months of 2009 indicates a marked deceleration in manufacturing exports from Southeast Asia which has had an adverse impact on employment in export-oriented industries. “Because the dramatic fall of exports took place at the end of 2008, it is not fully reflected in that year’s rates of GDP growth. The brunt of its impact will be reflected in the 2009 growth rates. The downward risks are high for all countries and suggest that the worst is still to come,” says ESCAP.
The organisation believes that Southeast Asia could be among the most affected by the crisis, given its integrated industrial production base and linkages to the global supply chain, thus deepening unemployment. It expects an overall economic growth rate of 1. 2 percent for Southeast Asia this year, the lowest among the developing Asia Pacific subregions. “The avenue that mitigated the 1997/98 economic crisis– boosting exports – has lost its prior effectiveness, and this is the region’s most significant vulnerability.
This is further exacerbated by calls for increased protectionism in recession-hit developed countries. ” The Survey also cautions that domestic demand is unlikely to compensate for the contraction in exports. “In open economies, domestic demand especially private consumption and investment is highly dependent on export demand and export prices. The rate of growth of private consumption in Malaysia declined gradually over 2008, from 11. 7 per cent in the first quarter to 5. 3 per cent in the fourth quarter.
The rate of growth of gross fixed investment dropped abruptly from 3. 1 per cent in the third quarter of 2008 (year-on-year) to -10. 2 per cent in the fourth quarter, averaging 1. 1 per cent for the year,” the Survey says. ESCAP believes that foreign investors’ financial difficulties will affect not only export-oriented projects but also projects in infrastructure and construction, thus further dampening FDI flows from both outside and within the region. Increases in the prices of oil and food had an impact on Malaysia’s inflation rate which increased to 8. per cent in the third quarter of 2008 compared to the same quarter in 2007. However, with sharply lower commodity prices towards the end of the year, inflation rate eased to 3. 9 percent in February 2009. The Survey maintains that the fundamentals of the Southeast Asian economies are stronger than during the previous 1997/98 Asian Financial Crisis, having instituted a wide ranging banking reforms, improved current account balances and built up a protective shield of foreign exchange reserves.
Malaysia held USD 85 billion in foreign exchange reserves as of the end of February 2009, down from USD 111 billion a year before. To support the economy in the face of the deepening crisis, Malaysia’s central bank cut its policy rate decisively, from 3. 5 per cent in November 2008 to 2 per cent in February 2009. The combination of drops in exports and cuts in interest rates contributed to a depreciation of the exchange rate from an average of 3. 2 ringgit per dollar in the first half of the 2008 to 3. 6 in the fourth quarter.
In January 2009, the government announced a fiscal stimulus package of RM 7 billion (US $1. 96 billion or 1 per cent of the GDP) which will go toward the promotion of strategic industries, small-scale projects such as village roads and school repairs, and education and skill training programmes. In March 2009, the government unveiled a second and much larger stimulus package of RM 60 billion (US $16. 2 billion or 8. 6 per cent of the GDP) to be implemented over 2009 and 2010. Malaysia’s budget deficit widened from 3. 2 percent of the GDP in 2007 to 5. percent in 2008, and is currently the largest among the Southeast Asian countries. This year’s edition of ESCAP’s flagship publication is entitled “Addressing Triple Threats to Development”. It analyzes the three global crises which have converged to threaten development in the Asia-Pacific region: the economic crisis, fuel and food price volatility, and climate change. The Survey provides a regional perspective as well as country-specific analyses, outlining ways in which economies in the region can move forward in unison towards a more inclusive and sustainable development path.
The Survey emphasizes that in regards to fiscal stimulus packages such as Malaysia’s, fiscal resources are limited and that today’s increases in budget deficits will eventually need to be cut. It is thus critical to be selective in the use of public funds. In particular, spending on policies that promote the long-term sustainability of energy and food markets as well as spending that addresses the deficiencies of current social protection systems are a valuable investment for the future while helping to support domestic demand in the short-term.
The release of the Survey in Kuala Lumpur was hosted by the United Nations in Malaysia and its findings were presented by Dr. Mahani Zainal Abidin, Director General, Institute of Strategic and International Studies, Malaysia and Dr. Muhammad Hussain Malik, Macroeconomic Policy and Development Division, UNESCAP. Malaysia Capable Of Facing Global Economic Crisis KUALA LUMPUR, March 4 (Bernama) -Malaysia is in a comfortable position and capable of facing the current global economic crisis based on its experience in handling the 1997/1998 financial crisis, Bank Negara Malaysia Governor,Tan Sri Dr Zeti Akhtar.
She said this during the Public Accounts Committee meeting chaired by Datuk Seri Azmi Khalid at the Parliament here today. Zeti said the policies and strategies undertaken by the government including the central bank in facing the previous economic crunch had given investors the confidence to continue to invest here. “The Governor has explained that the way we handled the past economic crisis had placed Malaysia at the most suited position to ride the ongoing economic downturn,” PAC Chairman Datuk Seri Azmi Khalid told reporters after the meeting today. We also hope that the people will have full trust in the country’s system (administration and finance) as not many countries in the world are at the point we are in now,” he said. Azmi said Bank Negara has also asked all government agencies and the private sector to come together to disseminate information on the financial package facilities available to the people which are to help companies, both big and small, as well as individuals impacted by the economic slowdown. Bank Negara also says that this is the time to have a more liberal policy in the insurance sector, especially in motor insurance,” he said. Deputy Prime Minister who is also Finance Minister, Datuk Seri Najib Tun Razak will be tabling the second economic stimulus package at the Parliament this March 10. The package is intended to drive economic activities in the country and help those affected by the global economic crisis. Malaysia’s Gross Domestic Product (GDP) grew at 4. 6 percent last year compared with a 6. 3 percent growth the previous year.
Malaysia’s trade forges ahead amid global financial crisis Malaysia’s trade managed to forge ahead on its growth path with an overall view on last year, although its exports suffered a major setback in the fourth quarter due to the global financial crisis. Malaysia’s Ministry of International Trade and Industry (MITI) Thursday unveiled a preliminary report here on the country’s trade performance in 2008, saying that the total trade value in the year was 1. 185 trillion ringgit (3291. 7 billion U. S. dollars), up 6. 8 percent against the previous year.
Among this, the total value of exports was 663. 51 billion ringgit (184. 30 billion U. S. dollars an increase of 9. 6 percent against the year 2007. “This performance was precipitated by a buoyant double digit export growth of 16 percent in the first nine months and the unprecedented decline of 18. 3 percent in exports in the last quarter,” the ministry said. The impact of the global financial slowdown made its impact on the performance of the fourth quarter, it said. The exports in December last year, valued at 46. 09 billion ringgit (12. 8 billion U. S. ollars), was the weakest record for the year, which was affected by the global financial crisis as well as the festive holidays. In 2008, electrical and electronic products remained Malaysia’s largest contributor to total exports, accounting for a 38. 3 percent share of the total, according to the report released by the ministry. However, Malaysia’s exports of these products in 2008 decreased by 3. 4 percent compared with the year 2007, which was mainly attributed to less exports of office machines and other machines and parts to the United States and Europe.
The country’s imports in 2008 posted 521. 5 billion ringgit (114. 86 billion U. S. dollars), also up 3. 3 percent from the previous year. The increase was contributed mainly by higher imports of consumption goods which grew by 11. 6 percent. The top four import sources of Malaysia were China, Japan, Singapore and the United States in 2008. Malaysia imported goods worth of 66. 85 billion ringgit (18. 57 billion U. S. dollars from China in the year. Major imports were electrical and electronic products, chemicals and chemical products, machinery, appliances and parts, iron and steel products, etc.
However, despite some slowdown of its exports in the fourth quarter of last year, the year of 2008 was the third consecutive year that the country’s total trade surpassed 1 trillion ringgit mark. Facing the global financial crisis, the MITI said that the Malaysian government has announced various measures since November2008 to address the impact, including introductions of strategies to stimulate and facilitate investment, trade and further liberalization of manufacturing related services. The ministry also said that it has fine-tuned its 2009 export promotion activities, mainly focusing on emerging and new markets.
The ministry also said that it was ready to help ease the financial burden of Malaysian exporters, especially small- and medium-sized enterprises. During these challenging times, Malaysia will continue to support efforts to ensure a liberal trading environment. Weathering the global financial crisis By TAN SRI DR WAN ABDUL AZIZ WAN ABDULLAH THE subprime mortgage crisis in the US housing market became apparent in mid-2007 and rapidly escalated into a global financial crisis. While the causality of the crisis is well documented, the depth, breadth and duration of its impact is mired in uncertainty.
Despite strong economic fundamentals, Malaysia, being a small, open and globally integrated economy, is not spared from the effects of the global financial crisis. The domestic economy was affected through trade and investment channels, and contracted significantly in the first quarter of 2009. The impact of the crisis is expected to ease in the fourth quarter with mild recovery next year. With world trade moderating significantly to about 3% by September 2008, Malaysia’s exports recorded double-digit declines in the final quarter of 2008 and the first quarter of 2009.
Export-oriented industries, particularly the electrical and electronics, were badly hit. Consequently, manufacturing output contracted sharply in the fourth quarter of 2008 and the first quarter of 2009. For the first time since 1998, the services sector registered a mild decline in the first quarter of 2009, in line with the lacklustre performance of trade-related activities. The economic downturn affected labour demand, as reflected in higher retrenchments and lower vacancies. During the first quarter of 2009, total retrenchments rose 74%, largely in the manufacturing sector.
The crisis also affected investor sentiment. Equity markets worldwide plunged and in tandem, the Kuala Lumpur Composite Index (KLCI) fell to 872. 55 points as at end-March 2009, from a high of 1,516. 22 points on Jan 11, 2008. Private consumption fell in line with lower disposable income and cautious spending of households. Weak external and domestic demand also impacted domestic investment sentiment, which saw total investments declining significantly in the first quarter of 2009. We have experience in managing crises.
During the 1997/1998 Asian financial crisis, Malaysia’s expansionary fiscal and accommodative monetary policies in resolving the economic crisis was viewed with scepticism. Interestingly today, similar counter cyclical measures are viewed by many as the appropriate approach to reinvigorate their ailing economies. Being a proactive and responsible Government, we introduced a RM7bil stimulus package in November 2008 to mitigate the impact of the global financial crisis. Monetary policy complemented the fiscal stance.
Among other measures, the Overnight Policy Rate and the Statutory Reserve Requirement were reduced to lower the cost of financing and financial intermediation. With most advanced economies in recession and the outlook for emerging and developing economies deteriorating rapidly, the Government introduced a more comprehensive stimulus package amounting to RM60bil in March. The second package primarily focused on training and job creation, easing the burden of the rakyat, sustaining credit flows to support private sector activities and building capacity for the future.
The impact of the stimulus packages is expected to be fully felt in the second half of 2009. Green shoots have emerged to indicate the possibility of recovery in global demand and with these encouraging signs, there is emerging consensus that the global downturn will stabilise in 2009 and recover next year. However, given the extent and severity of the decline in global demand since the second quarter of 2008 as well as its lagged impact on the Malaysian economy, growth is expected to contract 4% to 5% in 2009 before registering mild growth in 2010.
The Government is mindful of the difficulties faced by the rakyat in these challenging times. We have provided training opportunities and allowances for retrenched workers. We continue to extend assistance to students, the disabled, the elderly and the poor as well as provide subsidies on basic food items like sugar, flour and bread. It is often said that we should not waste a crisis as it also opens up opportunities to restructure and move towards a more liberalised and high income economy.
Moving forward, creativity, innovation and high value-added activities will be the key drivers of the new economic model. We will intensify development of niche growth areas such as Islamic finance, halal industry and tourism, while leveraging on green technology. Low-skilled and low-cost labour will be replaced with automation and highly-skilled jobs. With these measures, the new restructured economy will also see increased contribution of the services sector, from the current 58% to 70% of the gross domestic product. We are committed to fiscal consolidation when the economy recovers.
We will continue to ensure value-for-money in government spending, including competitive bidding. More importantly, the Government will gradually roll back and facilitate the private sector to play a more active role to drive the economy. This requires the private sector to rise to the challenge and seize opportunities available. At the same time, the Government will not neglect its responsibility to providing a more comprehensive social safety net for the poor and vulnerable groups. Malaysia’s economic fundamentals remain strong.
We have a sound banking and financial sector, strong international reserves, high savings and diversified sources of growth. Building on these inherent strengths and with the implementation of policies consistent with the new economic model, Malaysia will be on a stronger footing to weather the crisis and resume its growth trajectory. Having said this, there is only so much that the Government can do. The private sector and the rakyat too must respond positively. Together, we can make this a reality. MARC FORECASTS MALAYSIA’S 2009 GDP GROWTH AT 3. % : RESILIENT AMID GLOBAL FINANCIAL DISLOCATION MARC views that the ongoing global turbulence roiling the financial markets will likely trigger a global recession in 2009 and accordingly forecasts Malaysia’s GDP growth for next year at 3. 5%. The world’s largest economy and Malaysia’s single largest trading partner, the United States (US) is likely to experience its first recession since 2001 as the financial crisis continues unabated with adverse impact on bank lending, investment and private consumption. As a result, the US economic performance will cast a long shadow on the rest of the world.
Other major economies, namely the Euro and Japan, are also not being spared from the current financial and economic malaise. Being an open economy, Malaysia and other regional countries are not immune from any crisis, especially one that is unprecedented as the current turmoil. These economies are now bracing for a decline in global trade volume due to an expected drop in external demand. In addition to external trade performance, Malaysian economic growth in 2009 will also be impacted by a slowdown in private investment as risk aversion heightens among investors.
As a consequent, business expansion plans are likely to be scaled down while portfolio investors may continue to stay on the sideline as evident by substantial net outflows in the second quarter 2008. Although Malaysia has, over the years, diversified its trade pattern with intra-trade with ASEAN countries becoming a significant feature of its economy, the expected moderations in the economies of G3 (US, Euro and Japan) could have knock-on effects on ASEAN economies as well. However, the silver lining in the Malaysian economy is the steady domestic demand, primarily supported by private consumption, which, while expected to moderate to 4. % in 2009 from an estimated 6. 3% this year following the impact of higher consumer prices and waning consumer sentiment, is anticipated to be a bulwark against a weakening global economy. Domestic demand in 2009 is expected to be underpinned by an accommodative monetary stance and a relatively stable labour market. In addition, Malaysia is in a more resilient position to cope with present economic challenges as reflected by huge surplus in the current account of balance of payment, a high level of external reserves and sound banking system that will help weather current economic challenges.
As of September 30, 2008, the amount of external reserves stood at RM379. 3 billion, sufficient to finance 9 months of retained imports and is 4. 1 times the total short-term external debt. This is in stark contrast with the situation during the Asian Financial Crisis in 1997 when external reserves dropped to as low as 2. 9 months of retained imports in October that year. The country’s financial institutions’ ability to provide ample liquidity is also a critical factor to insulate the Malaysian economy from a credit crunch.
A loan-deposit ratio in the banking system that continues to remain below 80% in the last 4 years also augurs well for its role to support lending activities. Additionally, there is no visible strain in the domestic financial market as is evident by the benign spread between interbank and Treasury Bills. Further underscoring the strength of the country’s financial institutions is the declining trend of net non-performing loans (NPL). The NPL ratio stood at 2. 5% in August 2008, compared with 13. 6% at the height of the Asian Financial Crisis.
Another measure, loan loss coverage, has risen to nearly 85. 1% in August 2008, thus providing ample buffer against possible financial losses. From a macro policy point of view, the general stabilisation plan as announced by Finance Minister I on October 20, 2008, will, to some extent, cushion the economy from a significant slowdown in 2009. MARC opines that although the impact of the government’s recent proposed measures to make investments more attractive for foreign investors will not be felt in the immediate-term, it is a move in the right direction. As for the monetary policy, MARC believes hat the authorities will continue to retain sufficient flexibility to adapt to changing economic conditions should the global slowdown begin to show signs of severely impacting Malaysia’s growth prospect in the near-term The measures in Budget 2010 are intended to delicately balance the need to address the government’s budgetary constraints while continuing to support the nascent economic recovery. The series of measures unveiled yesterday are focused on reducing the budget deficit by trimming operating expenditures and broadening the revenue base through the re-introduction of several taxes.
Consequently, the budget deficit as a percentage of gross domestic product (GDP) is expected to shrink dramatically to 5. 6% in 2010 from an estimated 7. 4% in 2009. The efforts to address the budget deficit have been undertaken in view of the persistent negative gap in the past 11 years and the expectation that oil-related revenue will slowly decline in the medium term following weaker oil prices after reaching its peak in July 2008. Moreover, efforts to generate non-oil revenue such as a possible introduction of goods and services tax (GST) will take time to be fully realized.
As a result, the government has announced aggressive cuts in operating expenditure and re-introduced selected taxes such as on disposal of real property as well as services tax on credit and charge cards. Among the sectors that may be negatively affected are the property sector due to the introduction of a fixed-rate tax on property sale, and the banking sector (with the exception of the Islamic banking sector), given the lack of tax incentives. Although the thrust of Budget 2010 is on reducing the budget gap, MARC reiterates its view that the budget deficit is not the only factor that can lead to long-term macro imbalances.
The action taken to trim the budget deficit should be balanced with measures to nurse the nascent economic recovery, while at the same time avoid further increasing government debt. Malaysia’s bond market is also an important factor in the country’s budgetary issues from a financing perspective. MARC is of the opinion that there should not be undue concern over the possibility of a downgrade in sovereign ratings as the sheer size and vibrancy of Malaysia’s bond market does not reflect any weakness in Malaysia’s macro foundation.
Apart from dealing with the budget deficit, Budget 2010 appear to be centered on facilitating access to finance for small businesses, subsidies for the agricultural sector and promoting foreign direct investment in certain sectors (as opposed to short-term pump priming). Visibly lacking are the “shot in the arm” measures. There is certainly a strong social welfare component which will address issues on the quality of human capital and long-term competitiveness.
The lack of generous short-term stimulants and aggressive public spending should ensure that Budget 2010 will be perceived as ‘neutral’ from a rating implication perspective. As for the capital market, the government’s extension of tax incentives for the Islamic banking and takaful sectors to 2015 will help Malaysia maintain its attractiveness as Asia’s leading Islamic financial centre. As Islamic finance has been identified as one of several areas that will facilitate Malaysia’s successful transition to a high-income economy, continuing with the incentives makes intuitive sense.
FDI in the Islamic banking and takaful sectors have been substantial in recent years and are expected to maintain an important role in sustaining FDI inflows into Malaysia. The stamp duty exemption of 20% on Islamic financing instruments and double deduction on expenditure incurred in promoting Malaysia as an international Islamic financial centre will support the origination of Islamic financial instruments and the development of new Islamic financial product offerings.
To bolster the equity market, the government has proposed measures to encourage flexible brokerage sharing between stockbrokers and remisiers and to make the dividend payment process more efficient. Meanwhile, the measures to liberalise foreign equity participation in corporate finance and financial planning companies should contribute to an overall strengthening of the business potential and growth prospects of the companies. However, MARC believes that it would have been ideal if the equity market-focused measures in Budget 2010 had been accompanied by measures to promote bond market activity, in particular, secondary trading.
MARC also welcomes measures to boost disposable incomes such as a 1% reduction in the income tax rate for the income group exceeding RM100,000 as well as an increase in personal tax relief by RM1,000 to RM9,000. However, MARC feels that gains from these measures will likely be offset by the lower petrol subsidies, the re-introduction of service charges on credit and charge cards, as well as the tax on disposal of real property. Overall, MARC feels that the projection for GDP growth between 2% to 3% in 2010 reflects the government’s autious stance with regards to the possibility of a double-dip scenario in the global economy. While MARC is slightly more optimistic in its projection for next year’s growth, anticipating a 3. 6% expansion, it foresees a bumpier ride towards a fully sustainable recovery, partly due to the relatively stretched household balance sheets and a much weaker economic performance of developed countries, particularly the United States, following a dramatic decline in household wealth.
More critical, in MARC’s view, is the long-term growth profile, which largely hinges on private investment prospects. As Malaysia needs to avoid seeing its average growth slip after recovering from this crisis, the measures that have been proposed in Budget 2010 are intended to strengthen the foundation of the economy in line with the country’s goal of becoming an innovative and a high-income nation. 7. 0CONCLUSION The current financial crisis afflicting the world economy has systemic elements and the countries affected cannot deal with the problem in isolation.
An effective response needs to combine measures at both national and international levels. Domestic factors have certainly played a major role in financial crises in some countries. However, others with sound economic fundamentals and institutions have also been affected by global financial instability. Moreover, the adverse impact of the crisis on commodity prices has been a major factor in reducing export earnings and growth in a number of countries, especially developing countries. A single recipe for responding to financial crises is neither feasible nor desirable.
Domestic policies need to be tailored to the specific circumstances of each country and designed to revive growth, restore confidence and ensure an orderly return to financial stability. Such efforts should be complemented by appropriate actions by developed countries. These efforts should ensure sustained economic growth and sustainable development. Recourse to protectionist policies cannot be the solution to current global problems, but would merely serve to deepen the crisis. Growth-oriented policies hold the key to averting the risk of global recession and pressures or protectionism. Recent events underscore the importance of a favourable external environment in attaining policy objectives in developing countries. An enabling external financial environment to support domestic measures could require, inter alia, adequate and transparent supervision of volatile, short- term capital flows. There is a need to reform the existing international financial architecture so as to reduce the likelihood of financial crises and to manage them better. Full representation and participation of developing countries should be an integral part of the reform process.
The views of developing countries should be taken into account. Effective multilateral and domestic surveillance is essential for the prevention of financial crises. Such surveillance needs to recognize the role of global interdependence in transmitting financial instability. Greater coherence is needed in international policy-making in the areas of trade, money and finance. Reform of the financial architecture should address weaknesses and gaps in the existing regulatory framework for cross-border lending and financial flows.
The scope of such reform may need to be extended to a wider range of financial activities. Greater transparency of the operations of private financial institutions, Governments and multilateral financial institutions is essential for effective surveillance of policies and supervision of markets and for timely action to prevent financial instability. A consultative process should be encouraged for this purpose. Strengthened prudential regulation and supervision of the financial system in a well-sequenced process of liberalization can contribute to greater financial stability.
Domestic reforms to be considered might include: (a) increased transparency and disclosure; (b) strengthening of domestic regulatory standards; and (c) more effective burden-sharing arrangements, such as improved insolvency and debtor-creditor regimes. There may also be a need to use other instruments to prevent the build-up of external financial vulnerability without impeding trade or medium- and long-term investment flows. Useful lessons can be drawn from the successful experiences in a umber of countries with the use of such instruments. However, regulation and control over financial flows should not be used to sustain inappropriate policies. While prevention of financial crises should be the ultimate aim of reform efforts, measures also need to be put in place for better management when crises arise. Establishing a genuine international lender of last resort with adequate resources to provide the liquidity needed to support countries facing external financial difficulties might be such a measure.
However, given the serious impediments to this, it may also be useful to explore alternative means of crisis management that would provide safeguards against speculative attacks and disruption of markets, prevent moral hazard, and secure more equitable burden-sharing between debtors and creditors. The establishment of orderly debt work-out principles could be further examined. Developed countries should also consider other actions to facilitate access to liquidity of developing countries facing external financial difficulties.
The Board expresses its appreciation for the sound, independent and timely analysis provided in this year’s Trade and Development Report. It urges the secretariat to continue to study international trade, monetary and financial issues as part of its work on interdependence with a development perspective as recognized by “A Partnership for Growth and Development”. The proposals for the prevention and management of financial crises contained in this year’s Trade and Development Report deserve wider dissemination and discussion, and further analysis.
Within its existing mandate and taking account of work undertaken in other relevant organizations, UNCTAD should contribute to the debate on issues related to strengthening and reforming the international financial architecture by continuing to provide relevant analysis from a development perspective. 8. 0REFERENCES Charles P. Kindleberger and Robert Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises. Hyman P. Minsky (1986, 2008), Stabilizing an Unstable Economy. Gernot Kohler and Emilio Jose Chaves Editors) “Globalization: Critical Perspectives” Haupauge, New York: Nova Science Publishers (http://www. novapublishers. com/) ISBN 1-59033-346-2. With contributions by Samir Amin, Christopher Chase Dunn, Andre Gunder Frank, Immanuel Wallerstein Robert J. Shiller (2008), The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It. ISBN 0691139296. Fratianni M. , Marchionne F. (2009), The Role of Banks in the Subprime Financial Crisis available on SSRN: http://papers. ssrn. com/sol3/papers. cfm? bstract_id=1383473 Markus Brunnermeier (2009), ‘Deciphering the liquidity and credit crunch 2007-2008’. Journal of Economic Perspectives 23 (1), pp. 77-100. Paul Krugman (2008), The Return of Depression Economics and the Crisis of 2008. ISBN 0393071014. “The myths about the economic crisis, the reformist left and economic democracy” by Takis Fotopoulos, The International Journal of Inclusive Democracy, vol 4, no 4, Oct. 2008. Funnell, Warwick N. In government we trust : market failure and the delusions of privatisation / Warwick Funnell, Robert Jupe and Jane Andrew.
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Working families in financial crisis : medical debt and bankruptcy : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Tenth Congress, first session, July 17, 2007. Washington : U. S. G. P. O. : For sale by the Supt. of Docs. , U. S. G. P. O. , 2008. 277 p. : ISBN 9780160813764 ISBN 016081376X http://purl. access. gpo. gov/GPO/LPS99198 Davis Polk Financial Crisis Manual http://www. undp. org. my/26-03-2009-malaysias-2009-economic-prospects-darken-as-exports-continue-to-slide http://www. bernama. com/bernama/v5/newsbusiness. php? id=394056
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