1. CURRENT GLOBAL FINANCIAL CRISIS AND
ITS IMPLICATIONS ON INTERNATIONAL
FINANCIAL INSTITUTIONS: THE CASE OF
MALAYSIA

2. Table of Contents Number of Pages
1.0 Introduction 1
2.0 Objectives of the study 3
3.0 Scope of study 3
4.0 Literature Review 4
5.0 Discussion and findings
5.1 Impacts on Malaysia 7
5.2 Steps taken by Malaysia 12
5.3 Effectiveness of steps 18
6.0 Limitations 22
7.0 Conclusion 22
References 23

3. Abstract
The purpose of this paper is to examine the impacts of current global financial crisis on international
financial institutions. However, the primary focus of this paper is limited, as more emphasis is put to
determine the effects of the crisis in the case of Malaysia. This study contributes to the knowledge of
Malaysian citizens and also investors to be well aware of the risks attached with investments in this
country. In addition, this paper also provides some level of exposure to Malaysian citizens about the
condition of our country particularly after being hit by the global financial crisis in the last few years.
Most of us think that the global financial crisis which occurred in 2007 was only caused by the subprime
mortgage. The truth is that there are a number of other factors which contribute to the crisis. The global
financial crisis gives several impacts to international financial institutions (IFI) and also to other
countries including Malaysia. In order to overcome this crisis, Malaysia has taken various steps. This
paper also aims to show how far is the effectiveness of the steps taken through the stability of Malaysia
economy.

4. 1.0 Introduction
According to business dictionary, global can be defined as planetary, world, worldwide which involves
the entire earth, not limited or provincial in scope. 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
(Investopedia, 2010). On the other hand, international financial institutions can be defined as public
banks and other credit institutions “owned” by more than one country which provides developmental
financing to borrowing governments in the Global South and private companies from the Global North
or South operating in those countries.
Several years ago, Malaysia was shocked by the crisis leading to the decline of the national
currency, where the national currency’s value stood at a very low level compared to previous years.
This crisis, which is widely known as the global financial crisis occurred in the year 2007. Even after five
years post-crisis, the after-effects resulting from the global financial crisis can still be felt until today;
with its epicenter in the United States (U.S.), whose economic situation after the crisis had severely
affected the Malaysian economy. In this context, two researchers, Mckibbin and Stoeckel (2009)
defined the term “crisis” as the bursting of the housing market bubble in the late of 2007, which resulted
in the collapse of the sub-prime mortgage market and related financial markets, and subsequently, the
collapse of the Lehman Brothers in 2008, which ultimately induced a sharp increase in risk premier all
over the world. From a housing crisis, it quickly grew into a banking crisis with investments and
merchant banks absorbing the initial impact before spreading further to the commercial banks.
Most people tend to blame the subprime mortgage as the one and only cause of the global
financial crisis. However, the truth is that the global financial crisis was not caused by one, single event.
Instead there are a number of other factors, which when put together, forms the underlying reasons that
have caused the global financial crisis. These reasons include overzealous or free market ideology,
financial innovations, faulty policies, preserve incentives, as well as outright deceptions, all of which are
interconnected with each other.
The global financial crisis began in the mid of 2007, starting with the credit crunch that resulted
in liquidity crisis in the U.S., following the loss of confidence of sub-prime mortgage investors towards
the sub-prime mortgage value. As the result, the Federal Bank of U.S. injected a large amount of
capital into the financial market. The crisis however, only turned for the worse as stock market all
around the world crashed, at the same time becoming highly volatile (Cannex, 2009). Other factors that
contributed to the global financial crisis are the sub-prime crisis and the housing bubble, where the
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5. latter have made homeowners become aware of the reality that they are unable to make payment for
their mortgages. In effect, the housing market in the U.S. suffered greatly, ultimately resulting in
numerous cases of evictions, foreclosures and prolonged vacancies. In addition, the effect of declining
home prices has turned the equity value of many borrowers to become negative as most borrowers
went default on their loans. Thus, banks were forced to take over the house and land in lieu of loan
borrowers who were incapable of repaying their loans. However, banks face large losses following their
takeover of homes at values much lower than at the original issuance. As a result from the fallout of
sub-prime lending bubble burst, banks suffered liquidity crisis, which led to a situation where getting
credit was tough and difficult. This situation is commonly referred to as the credit crunch (Cannex,
2009).
The crisis that occurred in the U.S. spread to Malaysia through two way-trade and financial
channels. According to Tan Sri Nor Mohamed Yakcop; “In 2008, the US capital flows to developing
countries totaled US $ 466 billion (RM1.7 trillion), compared to US $ 929 billion (RM3.5 trillion) in 2007.
However, for 2009, total net capital flows is expected to be US $ 165 billion (RM623 billion), a large
reduction. Malaysia is involved because the country depends on foreign direct investment (FDI). Global
bond markets also performed badly. In the second quarter of 2008, the global bond market is estimated
to be U.S. $ 50 billion; however it fell drastically and only amounted to U.S. $ 5 billion in the fourth
quarter of 2008”. The spread of the crisis in Malaysia in terms of trade occurs when global demand fell
in the fourth quarter of 2008. This situation affected Malaysia as one of the country’s exporters. Being
an integrated commercial operation, a sudden decline in Malaysia's exports will be greatly missed. In
addition, the value of goods exported by Malaysia decrease sharply as oil prices more than double than
previously while palm oil is down sharply over the forecast (Utusan Malaysia, 2009). Although more
than one financial crisis has happened in the past, economists have yet to learn a lesson from them,
thus we can only live happily for a while - but not for ever after (Malik, Ullah, Azam, & Khan, 2009).
As a consequence from the global financial crisis, international financial institutions and
Malaysia have each experienced a number of impacts. In the case of Malaysia specifically, the global
financial crisis has cast doubts on the capability or the efficiency of Malaysia’s government plans
towards realizing Vision 2020 following the collapse in Malaysia’s exports as well as the slowdown in
foreign direct investment (FDI) (Abidin & Rasiah, 2009). This paper is structured as follows: section 2
discusses literature review, section 3 outlines discussion and finding, and section 4 discusses
conclusion and limitations of study.
2

6. 2.0 Objectives of the Study
1) To determine the impact of global financial crisis in Malaysia
2) To examine the steps taken by Malaysia in order to overcome the global financial crisis
3) To determine the effectiveness of the steps that has been taken by Malaysia
3.0 Scope of Study
The purpose of the study is to investigate the current global financial crisis and its implications on
international financial institutions. However, we will focus more on the case in Malaysia. Here, we want
to see the effects of global financial crisis on Malaysia, steps that has been taken by Malaysia in order
to overcome the crisis as well as the effectiveness of those steps. The reason why we have chosen
Malaysia as our scope of study is because we want to know in more detail about the condition of our
country so that as Malaysian citizens we can be better prepared for the future should another financial
crisis occurs again.
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7. 4.0 Literature review
The “crisis” is defined as the bursting of the housing market bubble in the late of 2007, the consequent
collapse in the subprime mortgage market and related financial markets and the subsequent collapse of
Lehman Brothers in year 2008, which resulted in a sharp increase in risk premier around the world
(Prema, 2010). This crisis came as surprise to many people, but not for others. Several major financial
institutions taken over by other financial institutions have either received government bailout or went
completely bankrupt in the last few months. Some of the biggest and most venerable banks, investment
houses, and insurance companies have either announced bankruptcy or have had to be rescued finally
(Nanto, 2009).
The global financial crisis ignited by the supreme credit crisis in the US, the world's largest
economic center and home to the dominant key global dollar and the most sophisticated and advanced
world financial system have caused the financial markets of the developed world to become unstable.
Subsequently, the prominent names in the banking industry collapsed, causing a large decrease in the
stock market about 40 percent from their recent high besides causing investment banks to collapse
(Velde, 2008). Dr. Thomas G. Aquino (2009) stated that since the Great Depression of the 1930's, the
current sub-prime crisis that has now grown into a massive global financial and economic crisis, to be
the worst crisis. Over the past few decades, this crisis is clearly different from other financial crises that
we have observed not only in width and magnitude, but also in origin. As a result of this global crisis, it
affected almost all countries in the world, not just a few, at the same time leaving an enormous impact.
Besides that, this financial crisis also has been rushed across the public private boundary,
which has hit the private firms and the financial statements has forced the new heavy demands on the
public sector’s finances. The crisis has surged across national borders within the developed world. The
financial crisis have also affected banks in the developing economies, as these banks too, have to
suffer contractions in credit lines and reduced financial flows. Due to the failure of leading financial
institutions such as IMF, IMF failed to respond to the Asian crisis during the second great recession.
IMF failed to predict the coming banking crisis due to the currency crisis (Malik, Ullah, Azam, & Khan,
2009).
In addition, in September 2008 the collapse of Lehman Brothers, which included global liquidity
squeeze, has affected Malaysia. US dollar funding pressures have caused rapid spread of wider cross
currency basis swap and sporadic evidence of difficulties in accessing credit. In mid-2008 and March
2009, the benchmark equity index has dropped about 30 percent. Portfolio outflows of around US $ 27
4

8. billion in 2008, and bank outflows surged in the second half of 2008, albeit at a smaller scale compared
to some other countries rely more on wholesale cross-border financing (Alp, Elekdag & Lall, 2012). The
collapse of Bear Stearns29, mortgage brokers, who were rescued by the government by JP Morgan
Chase and the Fed, signaled that other financial institutions can also be in dire straits and that systemic
risk is now a clear and present danger. By early April 2008 more financial institutions, such as UBS and
Citigroup, have announced huge losses.
After the implosion of the subprime mortgage crisis in year 2007, five of America’s largest
investment banks have been reborn as commercial banks. The reality in the financial markets brought
to light not only the weaknesses in cross-border banking but also the seriously wounded faith of many
academicians, economists, and governments in the financial globalization and capitalism. The collapse
of the banking system in Iceland, the fall of Fortis which a Belgo-Dutch Bank, and Lehman Brothers all
can be explained by the intricate and complex web that ties the fates of multiple countries together of
that with the economy and financial markets of the US. Amidst the financial turmoil and partial
nationalization of financial firms, Malaysia’s financial system appears to be resilient. However, as the
world heads towards a global recession, Malaysia would not be left off the hook. The implications of the
US financial crisis on the Malaysian economy gives the big impact on the Malaysian banking and
finance industry and structure. Based on the secondary data obtained from the IMF in October, the
economic variables might have changed since then as the macroeconomic variables in many countries
have taken a turn, some for the better and some for the worse. This implies that the huge liquidity
supplies by central banks of developed nations are used to strengthen capital positions of financial
institutions instead of rechanneling these funds into the economy. This is a great source of concern as
it implies that the real economy of the US would be slowing down dramatically as financial institutions
accept tighter credit lending policies in an effort to recapitalize. Many countries in Asia are adversely
affected by the US financial crisis. The newly industrialized Asian economies are heavily affected by the
US mainly because the advanced economies remain their biggest trading partners (Mindstorm, 2009).
The 3 main shocks capture the onset of the global financial crisis: (1) The bursting of the
housing bubbles causing a reallocation of capital and a loss of household wealth and drop in
consumption; (2) Sharp rise in the equity risk premium which means the risk premium of equities over
bonds causes the cost of capital to rise, private investments to fall and demand for durable goods to
collapse; and (3) A reappraisal of risk by households causing them to discount their future labor income
and increase savings and decrease consumption (Mckibbin & Stoeckel, 2009).
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9. The global financial crisis has hit Malaysia, but with a slightly way from the AFC. Shock in this
crisis is sent by the financial sector and trade (Sheng, 2010). However the drop to the other parts of the
financial sector is limited as a property assets bubble. In addition, Malaysia banks are not very exposed
to toxic financial assets. Besides that, the major effects on Malaysia’s economy come from trade
channels. Private investment fell not only because of an outflow of direct investment by Malaysian
companies overseas; no less important is the decline in foreign investment to Malaysia. All countries,
including Malaysia, has injected monetary and fiscal stimulus significantly to their economies (Khoon &
Hui, 2010). According to Kawai, in 2009, ADB has lowered the forecast for the Asian Pacific region,
from 5.6% to 3.4%. Meanwhile, decrease of 5% for ASEAN countries like Malaysia, Singapore and
Thailand, all primarily vulnerable to recession fears projected by the World Bank. By 40% last year and
the trend ASEAN trade continued to show the world is shrinking.
At the end of 2007, almost all of the financial institutions in the United States and other parts of
the world including international level such as Iceland, Hungary, Country Ukraine, and other Easter
European and Baltic endured heavy losses from their collateralized debt obligations (CDO’s), credit
default swaps (CDS’s), and other financial assets (Sandler, 2010). Luckily, Malaysia’s financial
institutions had slight exposure to these toxic products. Besides, Malaysia’s financial institutions and
banks were in stronger and better shape than they were during the Asian Financial Crisis (AFC) with
better and improved financial management and guideline. The capital adequacy ratio has always equal
more than 13% after year 2001, which is higher than the 8% requirement by the Basel International
standard for minimum capital adequacy ratios of banks. While the nonperforming loan as a percentage
of total loans declined from 11.5% to 2.6% in year 2008, on the eve of Global Financial Crisis (GFC).
Asian countries including Malaysia began to feel the adverse impact to the GFC towards the second
half of year 2008 and early 2009 (Khoon, Hui & Sua, 2010).
According to Masahiro Kawai, Dean, Asian Development Bank Institute (2008) stated that
Asian financial institutions’ exposure to subprime-related products was limited due to three factors: (i)
they were lagging behind global financial institutions in incorporating highly complex financial
innovations into their business models; (ii) many of them were cautious in investing in high-risk, high-
return instruments such as MBSs and CDOs after experiencing their own financial crises ten years ago;
and (iii) their authorities have strengthened prudential supervision and regulation and risk management
practices in their respective financial sectors (Ravenhill, 2001).
The current financial crisis has become a major international event compared to the 1997-1999
financial crisis. The main difference between these two crises is that emerging markets took less impact
6

10. than the advanced economies. Mortgages originated in 2007 however, showed the worst performance
performance.
In the third quarter of 2007, 43% of foreclosures subprime Adjustable Rate Mortgage (ARM), 19% in
rter
prime ARM, 18% fixed rate on prime, 12% at a fixed rate and 9% of subprime mortgages with insurance
coverage of Housing Administration Federation. Clearly, the mechanism of adjustable rate m
djustable mortgage is
one of the main triggers of a crisis (Sapir, 2008).
f
5.0 Discussion and findings
5.1 Impacts on Malaysia
Global financial crisis actually did not originate in Asia, and indeed, direct damage to the financial
statements. Sector in Asia has been far less than in Europe and US. However, the Asian economies
have been hit hard by a sharp fall in demand in advanced economies and elsewhere. The global
financial have give several impact to Malaysia in various aspects. For the period 2000 to 2006, a
slowdown in GDP growth in most countries of ASEAN and Malaysia's GDP growth rate grew almost to
the level before the 1997 ASEAN financial crisis.
The impact of the GFC under GDP and components is the prevalence of accidents in the
aggregate global demand on the Malaysian economy can be seen from several sectors and markets.
Based on the graph above, Malaysia's economy achieved an average real growth rate of 5.42 percent
achieved
from 2000 to 2005, in 2006 the real growth rate continued to rise to 5.83 percent. However, in the
middle of 2007 where the GFC was begin, the Malaysia growth rate is little bit decrease compared the
7

11. year before the crisis and increase suddenly on 2008. At the end of 2008, overall GDP Malaysia growth
rate slowed to 0.1 percent and a contraction of -6.2 percent in first quarter of 2009 before falling in the
second quarter years of -3.9 percent. In the first two quarters of 2009 the Malaysian economy has
clearly entered a recession due to a decline in GDP. The contraction is expected to further reduce
Malaysia's capacity to reach 2020 income per capita of U.S. $ 15,341 under Vision 2020 program.
Malaysia is expected to record a deficiency of 26 percent in GDP from the 2020 vision of the road. The
Malaysia growth of GDP take more time to absorb the spread, as the growth rate of GDP fell
significantly only from the third quarter of 2008 and the first negative growth rate was recorded only in
first quarter of 2009 in comparison with developed countries and East Asia. However, further
contraction is forecast by BNM throughout the year shows that the worst is not over, and Malaysia will
recovered later from many other countries in East Asia is due. The threat of global economic downturn
was triggered by the financial turmoil of the United States in the year 2008.
Besides that, GFC also effect on Malaysia's exports exacerbated by the fact that more than 40
percent of Malaysia's exports were destined for the G3 countries, which are United States, Japan and
Europe that have been badly hit by the GFC. Exports of goods or services are provided to foreign
consumers by domestic producers or suppliers. The goods that export in commercial quantities
normally need involvements of the customs authorities in both of the country of export and import.
When we are looking at the performance of international trade, exports contracted by 13.3 percent in
Q4 2008, reflecting Malaysia's major export markets slowly. The graph above show that the reduction in
the values of export continuous fall, which is not only, has affected industrial production in export-
oriented sectors, but also indirectly from the reduced demand domestic manufacturing and service
sectors and others as Malaysia is an exporter to the country that are badly effect by the GFC make the
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12. demand for the goods and services offer by Malaysia fall down. Many cases in 2000 larger 2001
decrease from those seen during the information technology bubble burst (Kawai, 2009).
In addition, GFC has also affected imports of intermediate goods used in exports. Malaysia
imports electronics, product that base on petroleum, plastics, vehicles, steel products and vehicles. The
main import partners of Malaysia are: Us, Japan, European Union, China, and Singapore. From the
graph, in January 2009, Malaysia's imports contracted by 32% to RM29.5 billion. Over 70% of imports
in this country are in the form of intermediate goods, imports fall faster than exports and Malaysia still
maintain as a small trade surplus. In the first quarter of 2009 exports remained weak with a contraction
of 15.2%. In the meantime; contraction imports continued to increase to 23.5% for this period. Shocks
arising from external market further intensified in Q2 2009, with the reduction in exports and imports for
17.3% and 19.7%.
The impact GFC on investment is the current crisis has reduced overall investment activities
worldwide. Tighter credit and cause a sharp drop in profits, has moved to slow down investment flows.
Investment is important to direct government spending and fiscal stimulus to mitigate effects of the
export contract aggregate demand falls. It is also significant to see the changes for inflow and outflow of
investment to analyze the impact of the crisis on investment flows. In the middle of 2008, a surge in
bank outflows has a negative impact on other investments which recorded net outflows of 11 billion
lower than the previous year with a net outflow of RM46.9 billion, due mainly to repayment of net
external debt by both official and private sector. In the first quarter of 2009, the aggregate demand
recovered sharply before declining again in the second quarter. However, the stimulus must also
ensure that it does not flow out through imports. Overall, Malaysia's investments abroad reached their
height in the second quarter of 2008 before falling sharply thereafter (Abidin & Rasiah, 2009).
9

13. Moreover, there are also some effects on employment as the consequences from global
financial crisis. Global financial and economic crisis had a negative impact on various industries and
businesses activities. Failure in business and retrenchment is due to the sharp decline in demand in
both developed and developing economies. The sectors most exposed to foreign trade may be
negatively affected by this. To reduce business costs, many firms will reduce wages and benefits;
alternatively, they can also shorten work hours, implementing a voluntary separation scheme and
retrench workers. The government took efforts to create new job opportunities in both public and private
sector even though we have experienced lower unemployment rates than the US and other European
countries (Mei, 2010). Before the crisis, Malaysia has a tight labor market. 3.5 percent unemployment
rate and the presence of nearly 2 million foreign workers to the economic crisis affect employment
opportunities for Malaysians citizens. According to World Bank report, about 8 percent of the
manufacturing workforce of more than 120,000 employees has lost their job because of the present
foreign workers who take the hit not balance. Decrease in number of workers, shorter working hours
and lower wages may have raised the absolute poverty and relative in the city (Khoon, Hui and Sua,
2010).
Other than that, the effect of bank intermediation of the banking crisis make Malaysia's banking
system entered the current global financial and economic crisis from a stronger position compared with
the Asian financial crisis in general. Part of the banking sector reform following the Asian financial crisis
was the consolidation and restructuring of the banking industry, together with improvements in
governance structure, risk management framework, infrastructure and practices, and capabilities
significant buildings undertaken to strengthen the foundations for stability finance. In addition, the
Malaysia's banking system operates in a variety of financial systems, with advanced capital markets.
Total bonds outstanding 86 percent of GDP, provides an alternative sources of financing for the
economy. Financing sources for businesses is balanced between equity and bond markets and the
banking sector, thus diversifying the credit risk concentration away from the banking system, thus
providing the banking system with increased capacity to cope with stress and shock (Ibrahim, n.d.).
The GFC also give impact to the inflation rate of Malaysia (Khoon & Hui, 2010). The inflation
rate in the Asia exhibit patterns during this crisis with other emerging markets-that is, increase from mid
2007 to early or mid 2008 and then fell. It is noted that Asia inflation rate fell faster and further away
from emerging markets, such as in the pre-crisis, the inflation rate in emerging Asia is lower than in
other emerging markets regions. Beside that are exchange rates. At the height of the Asian financial
crisis, currencies of emerging market economies in East Asia except for the mainland China and Hong
10

14. Kong SAR huge decline in the US dollars. This time, the decline in currencies of emerging Asia is more
modest, particularly with reference to the U.S. dollar.
The next impact is on domestic money market and debt money market. In the domestic money
markets, ample liquidity has been maintained. Financing structure of the Malaysian banking system is
mostly based on deposits of about 70% of the total financing and is primarily denominated in domestic
currency. This is used to ringgit-denominated assets of funds that support the domestic sector.
Depositors same basic balance between wholesale and retail deposits, thus providing a more stability
to bank financing. For the period of July 2007 until September 2009, the banking system also maintains
a comfortable loan to deposit ratios, which average 77.3%. Now, the banking institutes are less
dependent on the interbank market compared to the period before AFC as they already learn
something from the AFC. Since 1998, the banking institutions in Malaysia have been required to
comply with the dynamic minimum liquidity requirements. As a precaution, the ringgit BNM liquidity
facility has been extended to all insurance companies and takaful operators to ensure that surge in
liquidity requirements by insurance companies can be met in the event unexpected increase in the
redemption or surrender of insurance policies in October 2008.
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15. 5.2 Steps taken by Malaysia
Few years ago, Malaysia is a part of the country that suffered during the global financial crisis. But,
because of an intelligent Malaysia’s Prime Minister during that times which is Tun Dr. Mahathir
Mohammad, our country did not take a high risk to borrow money from the IMF that bring the big trouble
on the economies until nowadays such the other countries that borrowed from the IMF.
As a developing country, Malaysia also takes several steps to overcome the crisis. Obviously,
some steps that were taken were very helpful. As Dr. K.S. Jomo (2009) who is UN assistant secretary-
general for economic development in the Department of Economic and Social Affairs, says such a
strategy is crucial or ensure delivery of important development targets such as poverty reduction. Dr.
Dr. Jomo also said that the stronger financial position is due to strong foreign reserves and better fiscal
balances, he said at a public lecture entitled, “The global financial crisis and the economic slowdown:
Implications for South-East Asia and the UN response”, on Thursday night.
With slowing down of inflation that has been decelerated from 8.5% in August 2008 to 3.5% in
March 2009, Malaysia has more room to pursue expansionary monetary policy to support domestic
economy. Bank Negara Malaysia has reduced the Overnight Policy Rate (OPR) three times by a total of
150 basis points between November 2008 and February 2009. According to Bank Negara Malaysia
Annual Report, 2008, p.99 and Monetary Policy Statement, announced by Bank Negara on 24
February, 2009 the OPR is currently maintained at 2%. Meanwhile, the Statutory Reserve Requirement
(SRR) has been reduced by 200 basis points to 1.0%.
There were several methods of solving the financial crisis that has been applied by Tun Dr.
Mahathir Mohammad during the crisis. Most of these methods are the result of the belief that
government intervention can break the deadlock of the turmoil of the financial crisis. Among the
government’s role is discussed in this section is the establishment of the National Economic Action
Council (NEAC), the freezing of the Ringgit, pegging of the Ringgit and the rejection of a loan from the
International Monetary Fund (IMF).
One of the steps is the establishment of the National Economic Action Council (NEAC) by the
government is organized steps to solve this economic crisis. The committee comprises Dr. Mahathir
himself as Chairman, Datuk Seri Anwar Ibrahim as deputy chairman and Tun Daim Zainuddin as
Executive Secretary. In addition, the NEAC also includes the Deputy Governor of Bank Negara
Malaysia, General Director of the Think Tank for Malaysia (Malaysian think-tank) and a number of
corporate leaders from the business. This task force is responsible for implementing the policies
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16. contained in the National Economic Recovery Plan (NERP). In addition, it is also responsible for holding
the meeting every day in order to seek solutions to economic problems, trade and currency. All the
results obtained from the task force will be carried out without the need to obtain prior consent of the
Cabinet.
The other step Malaysia had taken is to peg the value of money so they do not continue to fall
in an uncertain world market. Additionally, trading of the Ringgit is only valid if done in Malaysia. This
has helped the government to restore control of the ringgit exchange rate. Malaysia's ringgit peg to the
U.S. dollar value as it is the strongest currency in the world market value. The ringgit has been pegged
at the value of RM 3.80 to USD $ 1 while the Malaysian currency exchange rates on foreign currency
value of others depends on the ratio to the U.S. dollar. The value of RM 3.80 is the most competitive for
Malaysia to compete with neighboring countries in a crisis. This is because if the value of the Ringgit
was pegged at a very high value compared to other neighboring countries Malaysia it will cause the
loss of financial resources from tourism, and food production. Countries that have trade relations with
Malaysia will definitely find a selection of other countries because of cheaper costs offered.
Besides that, Malaysian government has acted quickly to freeze the property Ringgit foreign
investors in Malaysia. This is to prevent freezing of the Malaysian currency from continuing to leak out
of the country in an environment in addition to the financial crisis. As such, the Malaysian currency will
only be running the country next only to maintain the purchasing power of consumers. For foreign
investors, the freeze is to prevent them from investing the Malaysian currency outside the country. They
are only allowed to invest deposits in Ringgit only in Malaysia only to further encourage business and
employment opportunities in the country. As a result of this government managed to restore the role of
self-government powers to determine the exchange rate of Ringgit against the previous currency
trading heavily influenced by foreign investors.
Other step is our government does not receive financial assistance from the IMF funds despite
the offer of U.S. $ 17 billion provided to countries in need. At the beginning of the financial crisis, IMF
control of the fierce money offer recommendations based on the formula of the IMF. However, Tun Dr.
Mahathir has refused a loan from the IMF on a number of factors and his evaluation of the
effectiveness of the IMF in the context of its implementation in Malaysia. Malaysia is unique in terms of
economic policy and development which is the 1970 New Economic Policy (NEP) and the 1990
National Development Policy (NDP) that government intervention aimed at improving the economic
status and restructure society in this country. Distribution of wealth is based on racial mold of the Malay
or Bumiputera, Chinese and Indians. Thus, per capita income and GDP cannot be made yardstick to
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17. see the economic status of each family or individual in this country because of the tendency for some
individuals not included in these statistics is very large. Tun Dr. Mahathir Mohamad wonders if the loan
from the IMF cannot be divided equally to all races to create injustice. He was very concerned that if the
matter will be a trigger to race riots as event May 13, 1969.
Back to what was Jomo’s was said before, at year of 2009, will see a drop of 10% in foreign
direct marked slowdown in export growth, especially in Asia. This in turn will result in a significant
slowdown in industrial production. Slower growth will also undermine progress in fighting poverty and
achieving the Millennium Development Goals (MDGs). The priorities include reflecting the economy,
fiscal and monetary measures to spur domestic demand and limit the spread of the crisis across
borders and to the real economy.
Furthermore, the transformation also implemented to overcome the financial crisis, including
the rationalization of the existing institution, the establishment of new institutions and introduction of
foreign competition. In December 2005, Danaharta liquidation is completed success in restructuring the
financial sector, which began in 1998 make Malaysia got less impact from the GFC. It involves the
systematic strategic developments that were implemented through the merger of stockbrokers’
investment banks, merchant banks and discount houses. In addition, the financial landscape witnessed
by regional and international integration more widely. There are three foreign Islamic financial
institutions were authorized to operate, in addition, foreign participation limit has been increased from
30% to 49% for the Islamic subsidiary, takaful and investment banks. Several local financial institutions
to penetrate foreign markets have been operating in a total of 20 countries (Laporan Ekonomi,
2006/2007).
The other step is consolidating the banking sector through merger and acquisition and
increased capitalization. The crisis manifested itself at the end of 2008, the balance sheets of financial
institutions Malaysia is one of the strong as NPLs accounted for only 2% of total loans and loan-deposit
ratio and below 90%. As a result, financial institutions do not face the threat of collapse as in the United
States and Europe. According to BNM (2003), corporate and household debt compared to the value of
financial assets has fallen rather than increased in that time. As such, made contain the negative
effects of the global crisis more easily. The regulatory front, Bank Negara should continue to direct
significant efforts and resources to strengthen its surveillance capability to detect, monitor and deal pre-
emptively with financial risks and vulnerabilities in the global and regional markets system. There are
efforts to develop the financial sector as an engine of growth. Studies have shown that banks play an
important role in promoting the creation of new industries as well as in generating spillover effects to
14

18. other sectors of the economy. Developed financial sector can also play an important role in mobilizing
talent and business activities to strengthen the R & D efforts leading to increased productivity, which
can drive internal growth in the economy in other sectors.
Other than that, reducing dependency on the existing financial market system and see this
crisis as an opportunity to introduce Islamic financial system through the establishment of expansion of
banks and financial institutions based on the tenets. Islamic finance market is seen to be getting even
in the European community itself. By introducing the actual currency system is a long-term solution to
cope with a repeat of this global economic crisis. Gulf countries are drawing up plans to use a currency
such as the European country is likely to expand the use of this currency all over the Islamic countries.
Khaleej dinar currency will be the currency of international choice if it is made with a backup to the unit
value of oil, for example, 40 dinars a barrel of oil equivalent. The value of such collateral will be a
guarantee to the stability of world currencies option to continue using the dinar (currency gold) and
dirham (silver currency) in international trade now seen as a necessity and needs to be accelerated
Implementation. This also could be an alternative solution to the problem of global finance today, which
is the main cause limiting due to the currency has no value and is easily manipulated backup
(Aziz,2008).
Malaysia is able to overcome the global financial crisis through trade relations with China.
China is emerging as a new economic power in the U.S. as well keep up with the rescue Asia from the
impact of financial crisis in Europe. After 30 years China has emerged as the most rapidly developing
and becoming the second economic power. The proof of millions of Chinese out of poverty while
successful foreign investment increased from two percent to 20 percent in 20 years. China has taken a
cue from the Asian financial crisis of 1998. Malaysia makes China the largest trading partner is the right
choice. Now the total investment in China recorded U.S. $ 6 billion (RM18.6 billion) and China
investment in the country U.S. $ 500 million. Although this figure is not balanced but the situation will
change and political stability would be a factor that could attract the attention of China to invest in the
country. Even the implementation of projects under the Economic Transformation Program (ETP) which
had been announced and many new projects have contributed to a strong domestic economy
movement. This proves that we can hold for possession of a strong domestic economy. One factor is
the source of a competitive economy such as oil palm, rubber, natural gas (LNG) and petroleum.
When the global financial crisis finally began to hit Malaysia in the second quarter of 2008, the
government began providing its own stimulus package. On 4 November 2008, the Government of
Malaysia has announced the first stimulus package of RM7 billion. Would be funds allocated to projects
15

19. that have high multiplier effects and immediately on the economy. In addition, a number of measures to
support private consumption has also been introduced, such as reduction of Employees Provident Fund
(EPF) contribution from 11% to 8% and vehicle loan eligibility for civil servants higher. Moreover
Malaysia on March 10 the government launched its stimulus program RM60billion (U.S. $ 16 billion).
Around 9% of GDP, this is one of the largest package of fiscal measure relative to GDP as announced
in this region, and follows the RM7 billion stimulus package in November last year. According to the
reports, there are four part of the expenses outlined in the new packages provided for the years 2009
and 2010.
The other steps that taken by the government policy responses. The response of governments
to the impact of the crisis on their economies depends in large part on their vulnerability to external
shocks, their degree of integration into the global economy, especially via trade and financial flows, and
the specific nature of the transmission mechanisms the determine the magnitude of the impact on each
individual economy. A number of countries embarked fairly rapidly on their own stimulus packages,
including Malaysia.
Next step is by resembling the similar policy measures in developed market economies,
governments in developing countries have focused on 4 sets of measures which is macroeconomic
policy, financial policy, trade policy and industrial policy. Policy interventions are determined by both
resource availabilities and the technical competence and ideology of the governments concerned.
Macroeconomic policy is characterized by a combination of fiscal and monetary policy interventions.
Tax-related measures include export tax rebates, temporary custom duty and value added tax
exemptions to reduce input costs in industries where there is no local production and cuts in corporate
tax and social contributions. Expenditure-related measures include increasing expenditure on
infrastructure. With respect to monetary policy, cut in interest rates and reductions in reserve ratios for
commercial banks have been used in an attempt to increase liquidity in financial markets.
Financial policy has essentially been aimed at rescuing distressed financial institutions. On the
assets side, policies have involved governments buying so-called toxic assets. On the liabilities side,
the provision of additional liquidity, expanding deposit protection schemes and the recapitalization of
banks have all been implemented. . Export credit lines and insurance facilities are being increased by
regional and international development banks to ease difficulties in opening letters of credit.
Others step is the trade policy initiatives are taking place within WHO rules, although some
concerns have been expressed about return to protectionism. While there is a general trend to increase
16

20. tariffs and such increases appear to have been kept within WTO-agreed boundaries, it is possible that
the measures taken by some countries may provoke retaliatory actions in the future. Furthermore, an
industrial policy measures, mainly confined to the most affected developed market economies, largely
consist of the provision of state aid to ailing industries. In developing countries, industrial policy
measures have been more limited.
Malaysia as one of the developing countries must take steps today to ensure prudent financial
regulation and capital account management techniques that can stem undesirable and excessive
capital inflows and to avoid sudden, disruptive large outflows. Equally important is affordable financing
channeled toward productive long-term investments, for example, through development banks.
17

21. 5. 3 Effectiveness of steps
After several steps taken by government of Malaysia in facing and overcoming the global financial
crisis, there are some improvements in the chosen indicators.
In some Asian countries, monetary policy is rarely done in the crisis. In this case, to maintain
exchange rate stability as a policy to reduce the policy options. The inflation rate can be reduced by
policy rate cuts widely. In Malaysia, high exchange rate inflexibility and no structural break in exchange
rate regime in the face of crisis. Therefore, monetary policy is likely not part of the measures adopted
during the crisis (Zeilesis, Shah & Patnaik, 2010).
According to research make by Kraay and Severn (2008), expansionary fiscal policy tends to
be smaller in developing countries from the developed world. Malaysia is a developing country. Other
than that, the additional fluctuations driven by procyclical fiscal policy has been found to weaken the
long-term growth (Fatas & Mihov, 2003). Stabilization and stimulation is the type that can be adopted
general policy response (Hannoun, 2009). Measured stabilization policy to accept the fact that the
adjustment is not inevitable and is intended to reduce pain and promote the orderly adjustment. For the
stimulus, it can eliminate the adjustment period at all and it involves a larger stimulus package.
Blanchard et al. (2008) pointed out that the optimal fiscal package should be timely as the need
for immediate action, remain as the moisture will last for some time longer, because contingent need to
reduce the possibility is considered "the Great Depression," others require a commitment to do more
collective, large as the current and expected decrease in private demand a massive diversification as
an extraordinary degree of uncertainty associated with any one step, and sustained so as not to lead to
debt explosion and adverse reactions of financial markets. There are also conflicting views on the ideal
characteristics of an optimal fiscal stimulus packages, such as the opinion of Summers (2008) stated
that the ideal characteristics of an optimal fiscal stimulus packages are timely, temporary, and targeted,
while Taylor (2008) felt that the permanent, pervasive, and predictable.
Effectiveness of fiscal stimulus packages are still in doubt implemented in Malaysia of about 10
percent of the GDP, introduced by the government to fight the global financial crisis. This occurs
because the stimulus package failed to address critical structural weaknesses mentioned earlier.
Otherwise happen that it stimulates private spending to replace public spending. Fiscal deficit to be
higher due to the implementation of public expenditure are met by implementation (Khoon, Hui, & Sua,
2010).
18

22. Economic situation in Malaysia is projected to decline in 2009 of 0.9 percent and have some
improvements in 2010 of 3.8 percent. In 2009, real GDP growth of Malaysia is expected to marginally
by 0.9 percent compared to 2000 which is 4.6 percent. Malaysia's export demand is decreasing and is
expected to contract 5.0 percent this year. This situation brings real weakness is a substantial risk to
both the resilience of domestic demand and overall economic buoyancy (Malaysia's Economic Outlook
2009-2020, 2009).
GDP growth forecast by expenditure components at constant prices
(Annual change %, constant 2000 prices)
2005 2006 2007 2008e 2009f 2010f
Real GDP 5.3 5.8 6.3 4.6 0.9 3.8
Domestic Demand 5.5 7.5 8.3 6.1 3.7 4.7
Consumption 8.5 6.1 9.9 9.1 2.9 4.4
Private 9.1 6.5 10.8 8.4 2.5 4.1
Public 6.5 4.9 6.6 11.6 4.5 5.5
Investment 5.0 7.9 9.6 1.1 5.6 5.2
Private 3.3 7.5 9.8 -8.1 0.5 2.6
Public 6.8 8.4 14.3 5.9 10.1 7.2
Net Trade
Exports 8.3 7.0 4.2 1.5 -5.0 0.5
Imports 8.9 8.5 5.4 2.2 -3.5 0.9
Note: Bank Negara Malaysia; e = estimate; f = projections by RAM Economics Research
a) Domestic demand
In 2009, growth in domestic demand is seen to moderate to 3.7 percent from 6.1 percent last
year. Expected slowdown in private consumption and investment activity had poor
performance. However, both these components in 2010 should increase towards the year.
Domestic demand is expected to improve in the next year of 4.7 percent.
b) Resilient consumption
Real GDP growth in 2009 will depend a lot on the resilience of domestic demand due to the
threat of slowing exports. However, it also affected the ability to stimulate domestic economic
growth as a result of rising unemployment in the hope of the people and the next can affect the
ability of domestic uncertainty. Short actual unemployment, threats to job security is one of the
19

23. major psychological impacts of a slower economy, leading to a collapse in consumption.
Therefore, the increase high unemployment is associated with the intensity of private
consumption patterns. Unemployment rose at a rate of 4.0 percent until 4.5 percent. In the year
2009, is expected to edge up just 2.5 percent.
c) Investment trends
In 2009, monetary policy still does not have significant effects mainly on private investment,
which is expected to remain sluggish with not as an estimated 0.5 percent. The private sector
plays an important role in ensuring sufficient investment activity in the economy. In 2010,
investment activity is expected to remain sluggish. However, private investment is expected to
recover slightly to 2.6 percent while the rate of growth of the public sector is expected to ease
to 7.2 percent.
d) Public-sector spending (fiscal stimulus package and impact on fiscal deficit)
Both consumption and investment activity is seen as strong supported by government spending
on stimulus projects and other measures, such as human capital development scheme. As the
result of fiscal stimulus, the total domestic demand increased, public investment is very strong
which about 10.1 percent, while public consumption is expected to grow 4.5 percent this year.
GDP growth remained positive in 2009, although some public sector support is a key
component of the economy compared with other countries to avoid recession.
e) External demand
In 2009, the total value of exports and imports respectively 5.0 percent and 3.5 percent.
Performance of manufactured exports showed a sharp decline in industry production since 3Q
2008. Exports of electronic goods are items most affected by the weakening external demand.
Consumer-oriented products will show a sharper decline in the coming quarter. Declining global
demand, especially products such as key export industries tend to attract a derived demand;
the slowdown is expected in the first half of 2009, and in line with the pattern detected by the
products E & E. The decline in imports due to a slump in demand investment good taking into
account the overall economic activity in the industry that slower. Predictions for 2010 indicate
some recovery of the value of exports and imports, respectively 0.5 percent and 0.9 percent.
20

24. Country 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Malaysia 3 2.8 3.7 3.8 3.6 3 3.6 3.5 3.2 3.3 3.7 3.5
Malaysia interest rate has been hovering amid 3 percent to 3.8 percent since year 2000 to
2002. Compare to others countries; Malaysia unemployment rate has been relatively stable. Therefore,
a 3.7 percent of unemployment rate was not such a shocking number after all. However, with the
impact of recession felt more 2009 than end of last year, the rate has definitely slipped further today.
According to International Trade and Industry Deputy Minister, Datuk Mukhriz Tun Mahathir it was
predicted by many that the rate may even reach 4.5 percent before end of the year. He said “To us, the
figure is high and we have never reached this high a figure before. At the same time, we are trying to
reduce the jobless rate,” he told reporters after launching the Third National Internship Challenge.
However, in 2010 percentage change of decreasing in unemployment rate is 9.09 percent compared to
the year before. This is proving that Malaysia gradually recovers from the global financial crisis (The
Star online, 2009).
21

25. 6.0 Limitations
In conducting this study, the main limitation was to find sufficient information and materials in regards to
the impacts of global financial crisis on international financial institutions. Most studies that we have
encountered thus far, primarily focuses on the impact of global financial crisis on various other fields;
such as economic, politics, social as well as health. Besides that, a number of journals also focus
primarily on the impacts of the crisis on the different economic regions, with more emphasis put into
examining how differently these regions responded according to the crisis. While we were able to
gather some information on how the crisis had affected international financial institutions, we feel that
the information we have obtained from the journals are somewhat less detailed.
7.0 Conclusion
In conclusion, global financial crisis did not have a very significant impact on Malaysia. This is shown by
the quick recovery that Malaysia has displayed, whereby the Malaysian economy has improved
compared to when the global financial crisis initially hit Malaysia. This quick recovery can mainly be
attributed to the effective and efficient stimulus package undertaken by the Malaysian government. In
addition, early transformation in the Malaysian financial and economic sectors following the Asian
financial crisis has also helped to better prepare Malaysia in absorbing the shocks that resulted from
the current global financial crisis. Overall, the steps taken by Malaysia have served the country well, as
its economy has shown positive signs in recovering from the crisis as early as in year 2010. Finally, it is
suggested that Malaysia strengthen its banking system to ensure abundant reserves for executing
support packages for economic recovery, and also increase its exports and imports with the developing
countries so as to avoid overdependence on the more developed countries in terms of trade, as these
developed countries are more susceptible to global financial shocks.
22

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