Rafael nadal (pdf)


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Rafael nadal (pdf)

  2. 2. Table of Contents Number of Pages1.0 Introduction 12.0 Objectives of the study 33.0 Scope of study 34.0 Literature Review 45.0 Discussion and findings 5.1 Impacts on Malaysia 7 5.2 Steps taken by Malaysia 12 5.3 Effectiveness of steps 186.0 Limitations 227.0 Conclusion 22References 23
  3. 3. AbstractThe purpose of this paper is to examine the impacts of current global financial crisis on internationalfinancial institutions. However, the primary focus of this paper is limited, as more emphasis is put todetermine the effects of the crisis in the case of Malaysia. This study contributes to the knowledge ofMalaysian citizens and also investors to be well aware of the risks attached with investments in thiscountry. In addition, this paper also provides some level of exposure to Malaysian citizens about thecondition 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 subprimemortgage. The truth is that there are a number of other factors which contribute to the crisis. The globalfinancial crisis gives several impacts to international financial institutions (IFI) and also to othercountries including Malaysia. In order to overcome this crisis, Malaysia has taken various steps. Thispaper also aims to show how far is the effectiveness of the steps taken through the stability of Malaysiaeconomy.
  4. 4. 1.0 IntroductionAccording to business dictionary, global can be defined as planetary, world, worldwide which involvesthe entire earth, not limited or provincial in scope. The term financial crisis is applied broadly to a varietyof 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 publicbanks and other credit institutions “owned” by more than one country which provides developmentalfinancing to borrowing governments in the Global South and private companies from the Global Northor South operating in those countries. Several years ago, Malaysia was shocked by the crisis leading to the decline of the nationalcurrency, 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 fiveyears 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 severelyaffected 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 resultedin the collapse of the sub-prime mortgage market and related financial markets, and subsequently, thecollapse of the Lehman Brothers in 2008, which ultimately induced a sharp increase in risk premier allover the world. From a housing crisis, it quickly grew into a banking crisis with investments andmerchant 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 globalfinancial 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 thathave 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 areinterconnected with each other. The global financial crisis began in the mid of 2007, starting with the credit crunch that resultedin liquidity crisis in the U.S., following the loss of confidence of sub-prime mortgage investors towardsthe sub-prime mortgage value. As the result, the Federal Bank of U.S. injected a large amount ofcapital into the financial market. The crisis however, only turned for the worse as stock market allaround the world crashed, at the same time becoming highly volatile (Cannex, 2009). Other factors thatcontributed to the global financial crisis are the sub-prime crisis and the housing bubble, where the 1
  5. 5. latter have made homeowners become aware of the reality that they are unable to make payment fortheir mortgages. In effect, the housing market in the U.S. suffered greatly, ultimately resulting innumerous cases of evictions, foreclosures and prolonged vacancies. In addition, the effect of declininghome prices has turned the equity value of many borrowers to become negative as most borrowerswent default on their loans. Thus, banks were forced to take over the house and land in lieu of loanborrowers who were incapable of repaying their loans. However, banks face large losses following theirtakeover of homes at values much lower than at the original issuance. As a result from the fallout ofsub-prime lending bubble burst, banks suffered liquidity crisis, which led to a situation where gettingcredit 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 financialchannels. According to Tan Sri Nor Mohamed Yakcop; “In 2008, the US capital flows to developingcountries 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 largereduction. Malaysia is involved because the country depends on foreign direct investment (FDI). Globalbond markets also performed badly. In the second quarter of 2008, the global bond market is estimatedto be U.S. $ 50 billion; however it fell drastically and only amounted to U.S. $ 5 billion in the fourthquarter of 2008”. The spread of the crisis in Malaysia in terms of trade occurs when global demand fellin the fourth quarter of 2008. This situation affected Malaysia as one of the country’s exporters. Beingan integrated commercial operation, a sudden decline in Malaysias exports will be greatly missed. Inaddition, the value of goods exported by Malaysia decrease sharply as oil prices more than double thanpreviously while palm oil is down sharply over the forecast (Utusan Malaysia, 2009). Although morethan 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 andMalaysia have each experienced a number of impacts. In the case of Malaysia specifically, the globalfinancial crisis has cast doubts on the capability or the efficiency of Malaysia’s government planstowards realizing Vision 2020 following the collapse in Malaysia’s exports as well as the slowdown inforeign direct investment (FDI) (Abidin & Rasiah, 2009). This paper is structured as follows: section 2discusses literature review, section 3 outlines discussion and finding, and section 4 discussesconclusion and limitations of study. 2
  6. 6. 2.0 Objectives of the Study1) To determine the impact of global financial crisis in Malaysia2) To examine the steps taken by Malaysia in order to overcome the global financial crisis3) To determine the effectiveness of the steps that has been taken by Malaysia3.0 Scope of StudyThe purpose of the study is to investigate the current global financial crisis and its implications oninternational financial institutions. However, we will focus more on the case in Malaysia. Here, we wantto see the effects of global financial crisis on Malaysia, steps that has been taken by Malaysia in orderto overcome the crisis as well as the effectiveness of those steps. The reason why we have chosenMalaysia as our scope of study is because we want to know in more detail about the condition of ourcountry so that as Malaysian citizens we can be better prepared for the future should another financialcrisis occurs again. 3
  7. 7. 4.0 Literature reviewThe “crisis” is defined as the bursting of the housing market bubble in the late of 2007, the consequentcollapse in the subprime mortgage market and related financial markets and the subsequent collapse ofLehman 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 financialinstitutions taken over by other financial institutions have either received government bailout or wentcompletely bankrupt in the last few months. Some of the biggest and most venerable banks, investmenthouses, 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 worlds largesteconomic center and home to the dominant key global dollar and the most sophisticated and advancedworld 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 thestock 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 1930s, thecurrent sub-prime crisis that has now grown into a massive global financial and economic crisis, to bethe worst crisis. Over the past few decades, this crisis is clearly different from other financial crises thatwe have observed not only in width and magnitude, but also in origin. As a result of this global crisis, itaffected 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 thepublic sector’s finances. The crisis has surged across national borders within the developed world. Thefinancial crisis have also affected banks in the developing economies, as these banks too, have tosuffer contractions in credit lines and reduced financial flows. Due to the failure of leading financialinstitutions 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 liquiditysqueeze, has affected Malaysia. US dollar funding pressures have caused rapid spread of wider crosscurrency basis swap and sporadic evidence of difficulties in accessing credit. In mid-2008 and March2009, the benchmark equity index has dropped about 30 percent. Portfolio outflows of around US $ 27 4
  8. 8. billion in 2008, and bank outflows surged in the second half of 2008, albeit at a smaller scale comparedto some other countries rely more on wholesale cross-border financing (Alp, Elekdag & Lall, 2012). Thecollapse of Bear Stearns29, mortgage brokers, who were rescued by the government by JP MorganChase and the Fed, signaled that other financial institutions can also be in dire straits and that systemicrisk is now a clear and present danger. By early April 2008 more financial institutions, such as UBS andCitigroup, have announced huge losses. After the implosion of the subprime mortgage crisis in year 2007, five of America’s largestinvestment banks have been reborn as commercial banks. The reality in the financial markets broughtto light not only the weaknesses in cross-border banking but also the seriously wounded faith of manyacademicians, economists, and governments in the financial globalization and capitalism. The collapseof the banking system in Iceland, the fall of Fortis which a Belgo-Dutch Bank, and Lehman Brothers allcan be explained by the intricate and complex web that ties the fates of multiple countries together ofthat with the economy and financial markets of the US. Amidst the financial turmoil and partialnationalization of financial firms, Malaysia’s financial system appears to be resilient. However, as theworld heads towards a global recession, Malaysia would not be left off the hook. The implications of theUS financial crisis on the Malaysian economy gives the big impact on the Malaysian banking andfinance industry and structure. Based on the secondary data obtained from the IMF in October, theeconomic variables might have changed since then as the macroeconomic variables in many countrieshave taken a turn, some for the better and some for the worse. This implies that the huge liquiditysupplies by central banks of developed nations are used to strengthen capital positions of financialinstitutions instead of rechanneling these funds into the economy. This is a great source of concern asit implies that the real economy of the US would be slowing down dramatically as financial institutionsaccept tighter credit lending policies in an effort to recapitalize. Many countries in Asia are adverselyaffected by the US financial crisis. The newly industrialized Asian economies are heavily affected by theUS 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 thehousing bubbles causing a reallocation of capital and a loss of household wealth and drop inconsumption; (2) Sharp rise in the equity risk premium which means the risk premium of equities overbonds causes the cost of capital to rise, private investments to fall and demand for durable goods tocollapse; and (3) A reappraisal of risk by households causing them to discount their future labor incomeand increase savings and decrease consumption (Mckibbin & Stoeckel, 2009). 5
  9. 9. The global financial crisis has hit Malaysia, but with a slightly way from the AFC. Shock in thiscrisis is sent by the financial sector and trade (Sheng, 2010). However the drop to the other parts of thefinancial sector is limited as a property assets bubble. In addition, Malaysia banks are not very exposedto toxic financial assets. Besides that, the major effects on Malaysia’s economy come from tradechannels. Private investment fell not only because of an outflow of direct investment by Malaysiancompanies 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 andThailand, all primarily vulnerable to recession fears projected by the World Bank. By 40% last year andthe 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 ofthe world including international level such as Iceland, Hungary, Country Ukraine, and other EasterEuropean and Baltic endured heavy losses from their collateralized debt obligations (CDO’s), creditdefault swaps (CDS’s), and other financial assets (Sandler, 2010). Luckily, Malaysia’s financialinstitutions had slight exposure to these toxic products. Besides, Malaysia’s financial institutions andbanks were in stronger and better shape than they were during the Asian Financial Crisis (AFC) withbetter and improved financial management and guideline. The capital adequacy ratio has always equalmore than 13% after year 2001, which is higher than the 8% requirement by the Basel Internationalstandard for minimum capital adequacy ratios of banks. While the nonperforming loan as a percentageof 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 secondhalf of year 2008 and early 2009 (Khoon, Hui & Sua, 2010). According to Masahiro Kawai, Dean, Asian Development Bank Institute (2008) stated thatAsian 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 financialinnovations 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 managementpractices in their respective financial sectors (Ravenhill, 2001). The current financial crisis has become a major international event compared to the 1997-1999financial crisis. The main difference between these two crises is that emerging markets took less impact 6
  10. 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 rterprime ARM, 18% fixed rate on prime, 12% at a fixed rate and 9% of subprime mortgages with insurancecoverage of Housing Administration Federation. Clearly, the mechanism of adjustable rate m djustable mortgage isone of the main triggers of a crisis (Sapir, 2008). f5.0 Discussion and findings5.1 Impacts on MalaysiaGlobal financial crisis actually did not originate in Asia, and indeed, direct damage to the financialstatements. Sector in Asia has been far less than in Europe and US. However, the Asian economieshave been hit hard by a sharp fall in demand in advanced economies and elsewhere. The globalfinancial have give several impact to Malaysia in various aspects. For the period 2000 to 2006, aslowdown in GDP growth in most countries of ASEAN and Malaysias GDP growth rate grew almost tothe level before the 1997 ASEAN financial crisis. The impact of the GFC under GDP and components is the prevalence of accidents in theaggregate global demand on the Malaysian economy can be seen from several sectors and markets.Based on the graph above, Malaysias economy achieved an average real growth rate of 5.42 percent achievedfrom 2000 to 2005, in 2006 the real growth rate continued to rise to 5.83 percent. However, in themiddle of 2007 where the GFC was begin, the Malaysia growth rate is little bit decrease compared the 7
  11. 11. year before the crisis and increase suddenly on 2008. At the end of 2008, overall GDP Malaysia growthrate slowed to 0.1 percent and a contraction of -6.2 percent in first quarter of 2009 before falling in thesecond quarter years of -3.9 percent. In the first two quarters of 2009 the Malaysian economy hasclearly entered a recession due to a decline in GDP. The contraction is expected to further reduceMalaysias 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. TheMalaysia growth of GDP take more time to absorb the spread, as the growth rate of GDP fellsignificantly only from the third quarter of 2008 and the first negative growth rate was recorded only infirst quarter of 2009 in comparison with developed countries and East Asia. However, furthercontraction is forecast by BNM throughout the year shows that the worst is not over, and Malaysia willrecovered later from many other countries in East Asia is due. The threat of global economic downturnwas triggered by the financial turmoil of the United States in the year 2008. Besides that, GFC also effect on Malaysias exports exacerbated by the fact that more than 40percent of Malaysias exports were destined for the G3 countries, which are United States, Japan andEurope that have been badly hit by the GFC. Exports of goods or services are provided to foreignconsumers by domestic producers or suppliers. The goods that export in commercial quantitiesnormally 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 inQ4 2008, reflecting Malaysias major export markets slowly. The graph above show that the reduction inthe 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 servicesectors and others as Malaysia is an exporter to the country that are badly effect by the GFC make the 8
  12. 12. demand for the goods and services offer by Malaysia fall down. Many cases in 2000 larger 2001decrease from those seen during the information technology bubble burst (Kawai, 2009). In addition, GFC has also affected imports of intermediate goods used in exports. Malaysiaimports electronics, product that base on petroleum, plastics, vehicles, steel products and vehicles. Themain import partners of Malaysia are: Us, Japan, European Union, China, and Singapore. From thegraph, in January 2009, Malaysias imports contracted by 32% to RM29.5 billion. Over 70% of importsin this country are in the form of intermediate goods, imports fall faster than exports and Malaysia stillmaintain as a small trade surplus. In the first quarter of 2009 exports remained weak with a contractionof 15.2%. In the meantime; contraction imports continued to increase to 23.5% for this period. Shocksarising from external market further intensified in Q2 2009, with the reduction in exports and imports for17.3% and 19.7%. The impact GFC on investment is the current crisis has reduced overall investment activitiesworldwide. 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 theexport contract aggregate demand falls. It is also significant to see the changes for inflow and outflow ofinvestment to analyze the impact of the crisis on investment flows. In the middle of 2008, a surge inbank outflows has a negative impact on other investments which recorded net outflows of 11 billionlower than the previous year with a net outflow of RM46.9 billion, due mainly to repayment of netexternal debt by both official and private sector. In the first quarter of 2009, the aggregate demandrecovered sharply before declining again in the second quarter. However, the stimulus must alsoensure that it does not flow out through imports. Overall, Malaysias investments abroad reached theirheight in the second quarter of 2008 before falling sharply thereafter (Abidin & Rasiah, 2009). 9
  13. 13. Moreover, there are also some effects on employment as the consequences from globalfinancial crisis. Global financial and economic crisis had a negative impact on various industries andbusinesses activities. Failure in business and retrenchment is due to the sharp decline in demand inboth developed and developing economies. The sectors most exposed to foreign trade may benegatively 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 andretrench workers. The government took efforts to create new job opportunities in both public and privatesector even though we have experienced lower unemployment rates than the US and other Europeancountries (Mei, 2010). Before the crisis, Malaysia has a tight labor market. 3.5 percent unemploymentrate and the presence of nearly 2 million foreign workers to the economic crisis affect employmentopportunities for Malaysians citizens. According to World Bank report, about 8 percent of themanufacturing workforce of more than 120,000 employees has lost their job because of the presentforeign workers who take the hit not balance. Decrease in number of workers, shorter working hoursand 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 Malaysias bankingsystem entered the current global financial and economic crisis from a stronger position compared withthe Asian financial crisis in general. Part of the banking sector reform following the Asian financial crisiswas the consolidation and restructuring of the banking industry, together with improvements ingovernance structure, risk management framework, infrastructure and practices, and capabilitiessignificant buildings undertaken to strengthen the foundations for stability finance. In addition, theMalaysias 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 theeconomy. Financing sources for businesses is balanced between equity and bond markets and thebanking sector, thus diversifying the credit risk concentration away from the banking system, thusproviding 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 inflationrate in the Asia exhibit patterns during this crisis with other emerging markets-that is, increase from mid2007 to early or mid 2008 and then fell. It is noted that Asia inflation rate fell faster and further awayfrom emerging markets, such as in the pre-crisis, the inflation rate in emerging Asia is lower than inother emerging markets regions. Beside that are exchange rates. At the height of the Asian financialcrisis, currencies of emerging market economies in East Asia except for the mainland China and Hong 10
  14. 14. Kong SAR huge decline in the US dollars. This time, the decline in currencies of emerging Asia is moremodest, particularly with reference to the U.S. dollar. The next impact is on domestic money market and debt money market. In the domestic moneymarkets, ample liquidity has been maintained. Financing structure of the Malaysian banking system ismostly based on deposits of about 70% of the total financing and is primarily denominated in domesticcurrency. 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 stabilityto bank financing. For the period of July 2007 until September 2009, the banking system also maintainsa comfortable loan to deposit ratios, which average 77.3%. Now, the banking institutes are lessdependent on the interbank market compared to the period before AFC as they already learnsomething from the AFC. Since 1998, the banking institutions in Malaysia have been required tocomply with the dynamic minimum liquidity requirements. As a precaution, the ringgit BNM liquidityfacility has been extended to all insurance companies and takaful operators to ensure that surge inliquidity requirements by insurance companies can be met in the event unexpected increase in theredemption or surrender of insurance policies in October 2008. 11
  15. 15. 5.2 Steps taken by MalaysiaFew 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. MahathirMohammad, our country did not take a high risk to borrow money from the IMF that bring the big troubleon 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 astrategy 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 fiscalbalances, 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% inMarch 2009, Malaysia has more room to pursue expansionary monetary policy to support domesticeconomy. Bank Negara Malaysia has reduced the Overnight Policy Rate (OPR) three times by a total of150 basis points between November 2008 and February 2009. According to Bank Negara MalaysiaAnnual Report, 2008, p.99 and Monetary Policy Statement, announced by Bank Negara on 24February, 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 thatgovernment intervention can break the deadlock of the turmoil of the financial crisis. Among thegovernment’s role is discussed in this section is the establishment of the National Economic ActionCouncil (NEAC), the freezing of the Ringgit, pegging of the Ringgit and the rejection of a loan from theInternational Monetary Fund (IMF). One of the steps is the establishment of the National Economic Action Council (NEAC) by thegovernment is organized steps to solve this economic crisis. The committee comprises Dr. Mahathirhimself as Chairman, Datuk Seri Anwar Ibrahim as deputy chairman and Tun Daim Zainuddin asExecutive Secretary. In addition, the NEAC also includes the Deputy Governor of Bank NegaraMalaysia, General Director of the Think Tank for Malaysia (Malaysian think-tank) and a number ofcorporate leaders from the business. This task force is responsible for implementing the policies 12
  16. 16. contained in the National Economic Recovery Plan (NERP). In addition, it is also responsible for holdingthe meeting every day in order to seek solutions to economic problems, trade and currency. All theresults obtained from the task force will be carried out without the need to obtain prior consent of theCabinet. The other step Malaysia had taken is to peg the value of money so they do not continue to fallin an uncertain world market. Additionally, trading of the Ringgit is only valid if done in Malaysia. Thishas helped the government to restore control of the ringgit exchange rate. Malaysias ringgit peg to theU.S. dollar value as it is the strongest currency in the world market value. The ringgit has been peggedat the value of RM 3.80 to USD $ 1 while the Malaysian currency exchange rates on foreign currencyvalue of others depends on the ratio to the U.S. dollar. The value of RM 3.80 is the most competitive forMalaysia to compete with neighboring countries in a crisis. This is because if the value of the Ringgitwas pegged at a very high value compared to other neighboring countries Malaysia it will cause theloss of financial resources from tourism, and food production. Countries that have trade relations withMalaysia 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 foreigninvestors in Malaysia. This is to prevent freezing of the Malaysian currency from continuing to leak outof the country in an environment in addition to the financial crisis. As such, the Malaysian currency willonly be running the country next only to maintain the purchasing power of consumers. For foreigninvestors, the freeze is to prevent them from investing the Malaysian currency outside the country. Theyare only allowed to invest deposits in Ringgit only in Malaysia only to further encourage business andemployment opportunities in the country. As a result of this government managed to restore the role ofself-government powers to determine the exchange rate of Ringgit against the previous currencytrading heavily influenced by foreign investors. Other step is our government does not receive financial assistance from the IMF funds despitethe offer of U.S. $ 17 billion provided to countries in need. At the beginning of the financial crisis, IMFcontrol 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 theeffectiveness of the IMF in the context of its implementation in Malaysia. Malaysia is unique in terms ofeconomic policy and development which is the 1970 New Economic Policy (NEP) and the 1990National Development Policy (NDP) that government intervention aimed at improving the economicstatus and restructure society in this country. Distribution of wealth is based on racial mold of the Malayor Bumiputera, Chinese and Indians. Thus, per capita income and GDP cannot be made yardstick to 13
  17. 17. see the economic status of each family or individual in this country because of the tendency for someindividuals not included in these statistics is very large. Tun Dr. Mahathir Mohamad wonders if the loanfrom the IMF cannot be divided equally to all races to create injustice. He was very concerned that if thematter 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 foreigndirect marked slowdown in export growth, especially in Asia. This in turn will result in a significantslowdown in industrial production. Slower growth will also undermine progress in fighting poverty andachieving 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 acrossborders and to the real economy. Furthermore, the transformation also implemented to overcome the financial crisis, includingthe rationalization of the existing institution, the establishment of new institutions and introduction offoreign competition. In December 2005, Danaharta liquidation is completed success in restructuring thefinancial sector, which began in 1998 make Malaysia got less impact from the GFC. It involves thesystematic strategic developments that were implemented through the merger of stockbrokers’investment banks, merchant banks and discount houses. In addition, the financial landscape witnessedby regional and international integration more widely. There are three foreign Islamic financialinstitutions were authorized to operate, in addition, foreign participation limit has been increased from30% to 49% for the Islamic subsidiary, takaful and investment banks. Several local financial institutionsto 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 andincreased capitalization. The crisis manifested itself at the end of 2008, the balance sheets of financialinstitutions Malaysia is one of the strong as NPLs accounted for only 2% of total loans and loan-depositratio and below 90%. As a result, financial institutions do not face the threat of collapse as in the UnitedStates and Europe. According to BNM (2003), corporate and household debt compared to the value offinancial assets has fallen rather than increased in that time. As such, made contain the negativeeffects of the global crisis more easily. The regulatory front, Bank Negara should continue to directsignificant 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 areefforts to develop the financial sector as an engine of growth. Studies have shown that banks play animportant role in promoting the creation of new industries as well as in generating spillover effects to 14
  18. 18. other sectors of the economy. Developed financial sector can also play an important role in mobilizingtalent and business activities to strengthen the R & D efforts leading to increased productivity, whichcan drive internal growth in the economy in other sectors. Other than that, reducing dependency on the existing financial market system and see thiscrisis as an opportunity to introduce Islamic financial system through the establishment of expansion ofbanks and financial institutions based on the tenets. Islamic finance market is seen to be getting evenin the European community itself. By introducing the actual currency system is a long-term solution tocope with a repeat of this global economic crisis. Gulf countries are drawing up plans to use a currencysuch 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 unitvalue of oil, for example, 40 dinars a barrel of oil equivalent. The value of such collateral will be aguarantee to the stability of world currencies option to continue using the dinar (currency gold) anddirham (silver currency) in international trade now seen as a necessity and needs to be acceleratedImplementation. This also could be an alternative solution to the problem of global finance today, whichis 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 theimpact of financial crisis in Europe. After 30 years China has emerged as the most rapidly developingand becoming the second economic power. The proof of millions of Chinese out of poverty whilesuccessful foreign investment increased from two percent to 20 percent in 20 years. China has taken acue from the Asian financial crisis of 1998. Malaysia makes China the largest trading partner is the rightchoice. Now the total investment in China recorded U.S. $ 6 billion (RM18.6 billion) and Chinainvestment in the country U.S. $ 500 million. Although this figure is not balanced but the situation willchange and political stability would be a factor that could attract the attention of China to invest in thecountry. Even the implementation of projects under the Economic Transformation Program (ETP) whichhad been announced and many new projects have contributed to a strong domestic economymovement. This proves that we can hold for possession of a strong domestic economy. One factor isthe 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, thegovernment began providing its own stimulus package. On 4 November 2008, the Government ofMalaysia has announced the first stimulus package of RM7 billion. Would be funds allocated to projects 15
  19. 19. that have high multiplier effects and immediately on the economy. In addition, a number of measures tosupport 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. MoreoverMalaysia 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 announcedin this region, and follows the RM7 billion stimulus package in November last year. According to thereports, there are four part of the expenses outlined in the new packages provided for the years 2009and 2010. The other steps that taken by the government policy responses. The response of governmentsto the impact of the crisis on their economies depends in large part on their vulnerability to externalshocks, their degree of integration into the global economy, especially via trade and financial flows, andthe specific nature of the transmission mechanisms the determine the magnitude of the impact on eachindividual 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 macroeconomicpolicy, financial policy, trade policy and industrial policy. Policy interventions are determined by bothresource 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 taxexemptions to reduce input costs in industries where there is no local production and cuts in corporatetax and social contributions. Expenditure-related measures include increasing expenditure oninfrastructure. With respect to monetary policy, cut in interest rates and reductions in reserve ratios forcommercial 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 theassets 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 ofbanks have all been implemented. . Export credit lines and insurance facilities are being increased byregional 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 someconcerns have been expressed about return to protectionism. While there is a general trend to increase 16
  20. 20. tariffs and such increases appear to have been kept within WTO-agreed boundaries, it is possible thatthe measures taken by some countries may provoke retaliatory actions in the future. Furthermore, anindustrial policy measures, mainly confined to the most affected developed market economies, largelyconsist of the provision of state aid to ailing industries. In developing countries, industrial policymeasures have been more limited. Malaysia as one of the developing countries must take steps today to ensure prudent financialregulation and capital account management techniques that can stem undesirable and excessivecapital inflows and to avoid sudden, disruptive large outflows. Equally important is affordable financingchanneled toward productive long-term investments, for example, through development banks. 17
  21. 21. 5. 3 Effectiveness of stepsAfter several steps taken by government of Malaysia in facing and overcoming the global financialcrisis, there are some improvements in the chosen indicators. In some Asian countries, monetary policy is rarely done in the crisis. In this case, to maintainexchange rate stability as a policy to reduce the policy options. The inflation rate can be reduced bypolicy rate cuts widely. In Malaysia, high exchange rate inflexibility and no structural break in exchangerate regime in the face of crisis. Therefore, monetary policy is likely not part of the measures adoptedduring the crisis (Zeilesis, Shah & Patnaik, 2010). According to research make by Kraay and Severn (2008), expansionary fiscal policy tends tobe smaller in developing countries from the developed world. Malaysia is a developing country. Otherthan that, the additional fluctuations driven by procyclical fiscal policy has been found to weaken thelong-term growth (Fatas & Mihov, 2003). Stabilization and stimulation is the type that can be adoptedgeneral policy response (Hannoun, 2009). Measured stabilization policy to accept the fact that theadjustment is not inevitable and is intended to reduce pain and promote the orderly adjustment. For thestimulus, 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 needfor immediate action, remain as the moisture will last for some time longer, because contingent need toreduce the possibility is considered "the Great Depression," others require a commitment to do morecollective, large as the current and expected decrease in private demand a massive diversification asan extraordinary degree of uncertainty associated with any one step, and sustained so as not to lead todebt explosion and adverse reactions of financial markets. There are also conflicting views on the idealcharacteristics of an optimal fiscal stimulus packages, such as the opinion of Summers (2008) statedthat 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 10percent of the GDP, introduced by the government to fight the global financial crisis. This occursbecause 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 behigher due to the implementation of public expenditure are met by implementation (Khoon, Hui, & Sua,2010). 18
  22. 22. Economic situation in Malaysia is projected to decline in 2009 of 0.9 percent and have someimprovements in 2010 of 3.8 percent. In 2009, real GDP growth of Malaysia is expected to marginallyby 0.9 percent compared to 2000 which is 4.6 percent. Malaysias export demand is decreasing and isexpected to contract 5.0 percent this year. This situation brings real weakness is a substantial risk toboth the resilience of domestic demand and overall economic buoyancy (Malaysias Economic Outlook2009-2020, 2009). GDP growth forecast by expenditure components at constant prices (Annual change %, constant 2000 prices) 2005 2006 2007 2008e 2009f 2010fReal GDP 5.3 5.8 6.3 4.6 0.9 3.8Domestic Demand 5.5 7.5 8.3 6.1 3.7 4.7Consumption 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 5.5Investment 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 7.2Net TradeExports 8.3 7.0 4.2 1.5 -5.0 0.5Imports 8.9 8.5 5.4 2.2 -3.5 0.9Note: 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. 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. 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 to2002. 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 theimpact 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 waspredicted by many that the rate may even reach 4.5 percent before end of the year. He said “To us, thefigure is high and we have never reached this high a figure before. At the same time, we are trying toreduce 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 tothe year before. This is proving that Malaysia gradually recovers from the global financial crisis (TheStar online, 2009). 21
  25. 25. 6.0 LimitationsIn conducting this study, the main limitation was to find sufficient information and materials in regards tothe impacts of global financial crisis on international financial institutions. Most studies that we haveencountered 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 focusprimarily on the impacts of the crisis on the different economic regions, with more emphasis put intoexamining how differently these regions responded according to the crisis. While we were able togather some information on how the crisis had affected international financial institutions, we feel thatthe information we have obtained from the journals are somewhat less detailed.7.0 ConclusionIn conclusion, global financial crisis did not have a very significant impact on Malaysia. This is shown bythe quick recovery that Malaysia has displayed, whereby the Malaysian economy has improvedcompared to when the global financial crisis initially hit Malaysia. This quick recovery can mainly beattributed to the effective and efficient stimulus package undertaken by the Malaysian government. Inaddition, early transformation in the Malaysian financial and economic sectors following the Asianfinancial crisis has also helped to better prepare Malaysia in absorbing the shocks that resulted fromthe current global financial crisis. Overall, the steps taken by Malaysia have served the country well, asits economy has shown positive signs in recovering from the crisis as early as in year 2010. Finally, it issuggested that Malaysia strengthen its banking system to ensure abundant reserves for executingsupport packages for economic recovery, and also increase its exports and imports with the developingcountries so as to avoid overdependence on the more developed countries in terms of trade, as thesedeveloped countries are more susceptible to global financial shocks. 22
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