Heterodox Measures and Corporate Crisis in Malaysia

Abstract

Capital control measures and fixed exchange rate were introduced by the Malaysian government in September 1998 in response to the economic problems that emerged following the 1997 currency crisis. Malaysia had tried out orthodox economic policies before September 1998, but these were unable to stem the rapid decline of the economy. Instead, they drove the economy into a deeper crisis. Capital and Exchange Controls (CEC) were considered essential to check exchange rate instability and the decline of international reserves. These heterodox measures would give the government greater autonomy over monetary policy. Along with the government?s directive to banks to increase loans to the business sector, CEC would help circumvent the collapse of the private sector. Since the financial crisis had increased the volume of non-performing loans (NPLs) in the banking sector and indebtedness of the corporate sector, the government established three institutions to deal with the matter. These were Danaharta, Danamodal and Corporate and Debt Restructuring Agency (CDRC). The government argued that if many businesses went bankrupt, not only would unemployment rise, but the financial sector would be in disarray or face insolvency. CEC, the reclassification of loans as NPLs, along with the introduction of low interest rates were attempts to help indebted firms by giving them more time to undertake the necessary restructuring to resolve their problems. In the experience of Malaysia, standard macroeconomic policies were unable to influence the economy at the sectoral or micro level. Therefore, other economic policies were introduced mainly to correct the imbalances which emerged mainly in the corporate and banking sectors. Whether the policies were orthodox or unorthodox is not the issue. The main issue is how to stimulate economic recovery as soon as possible in order to avoid any long- term economic and social crises. This study assesses the extent to which the implementation of CEC was able to stimulate economic recovery.