How Singapore and Malaysia Dealt With Financial Crisis

The research explains and compares how Singapore and Malaysia dealt with the Asian Financial Crisis. It shows how the government of both countries came up with strategies to overcome the crisis. It also shows a timeline of crises faced by Singapore, and how this has enabled our county to grow in times of adversity.

Research Questions:

My research questions were to compare how Singapore and Malaysia dealt with the Asian financial crisis, as well as proving that countries that dealt with crises effectively were able to develop socially and economically better and more efficient than its counterparts that struggle. I will also state a time line of Singapore’s past crises.

Hypothesis:

My hypothesis was that the Singapore government is able to come up with quick solutions to halt the spread of crises in Singapore, and come up with much more viable solutions to not only solve the problem at hand, but also to ensure that such issues do not heavily affect us in the future. I also thought that Singapore’s ability to deal with crises is the best within the South East region.

Literature Review:

In http://www.fas.org/man/crs/crs-asia2.htm, the author states that the shortage of foreign exchange in Thailand, Indonesia, South Korea and other Asian countries that has caused the value of currencies and equities to fall dramatically’, as well ‘inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies’ caused the financial crisis in South East Asia. It also shows how the IMF decided to deal with the crisis. The source is quite credible due to the fact that the author is a specialist in Industry and Trade Economics Division, and presented his findings to the US Congress in 1998. It is seen that he takes the stance from the American government point of view, as the crisis affected America as well. Hence, he focuses on how Asian markets failed, and what the IMF did to solve the problem. Other than that, his report was mainly based on America

As compared to http://www.iseas.edu.sg/vr82000.pdf, the author Ngian Kee Jin is a Singaporean and hence speaks about the crisis through Singaporean eyes. He is also considered reliable, considering he published a book on the crisis. Instead of looking at what other institutions did to help resolve the crisis, he focused on how Singapore itself dealt with the financial crisis. He spoke favourably of Singapore in dealing with the crisis, stating that ‘the large and adverse economic shocks triggered by the Asian financial crisis could potentially have had a devastating effect on the Singapore economy. However, Singapore has withstood the financial storm lashing the region and even managed to maintain a relatively favourable economic performance.’ Hence I feel more inclined to side the Singaporean who weathered the storm together with his country.

And in http://www.hartford-hwp.com/archives/54/003.html, Deirdre Griswo, a journalist for Worker’s World newspaper, stated how the financial crisis came about, but this contradicts the 1st source. The author blames the imperialistic American and European economies for bringing about the crisis, stating that ‘a huge runup in debt servicing has begun to seriously drain these countries’ economies for the benefit of the big imperialist world banks. This and the weakening of global markets underlie the (financial) crisis.’ He criticizes the western economies of exploiting and making use of their lesser developed counterparts, causing developing Southeast Asian countries to structure their economies around Western markets, and hence forming cheap labour industries. I am also inclined to believe this source as it is not written solely on the western markets’ behalf, but also as it gives readers an insight on how the financial crisis started. The publishing company the writer works for does not represent any western corporation or industry, unlike the 1st source which was presented to the US Congress.

Timeline of Singapore’s crises:

1950 – Maria Hertogh riots

1955 – Hock Lee Bus riots

1956 – Chinese Middle School Riots

1962-66 Konfrontasi

1963 – Operation Coldstore

1964 – Race riots

1965 – MacDonald House Bombing

1987 – Operation spectrum

1997 – Asian Financial Crisis

1997 – Southeast Asian haze

2001 – Embassy and MRT Bomb threat

2003 – SARS

2006 – Avian Flu

And in this essay, I will be focusing on an important crisis that happened in Singapore, the 1997 East Asian Financial Crisis.

Overview of The Financial Crisis

To give a brief overview on the Asian Financial Crisis, it occurred in mid-1997. Before the crisis, East Asian countries had been a prime location for investment, and foreign investments came pouring in. At that time, East Asian countries were developing and near-industrialised. ‘The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region’s economies received a large inflow of hot money and experienced a dramatic run-up in asset prices’1 Hence, this was described as ‘Asian Economic Miracle’. However, miracles rarely happen, and so it was proved. Due to the great amounts of investments made by foreign investors into the East Asian region, hence the region was greatly dependent on the investments to keep its economies afloat.

However, when the American economy recovered from a mid-1990 recession, its federal bank started to raise its dollar and interests to head off inflation. This coupled with the lost in confidence of foreign investors of securities in East Asia who began to pull money out of the regions markets to invest in the US, caused inflation of the Asian currency and loss of jobs. This domino effect on the East Asian countries meant a financial crisis, as their GDP pre-crisis was 8-12%.

Singapore

Singapore and Malaysia were greatly affected by this crisis.

Singapore, being a small country that largely depended on external investments and trade as we had no natural resources, was sent into recession and financially vulnerable. The result of this crisis resulted in a great decrease of trade and export to financially-hit countries, hence its exports even fell behind competitively to third-world countries’ exports. Our banks were also affected due to its lending exposure to the crisis-hit countries.

However, with the quick thinking of the Government, the country managed to halt and overhaul the economic slump. 3For example, ‘the Monetary Authority of Singapore allowed for a gradual 20% depreciation of the Singapore dollar to cushion and guide the economy to a soft landing. 5′ Based on Ngiam Kee Jin’s report ‘Coping with the Asian Financial Crisis: The Singapore Experience’, he states ‘Singapore’s resilience appears to be rooted in strong macroeconomic’ fundamentals’, sound macroeconomic policies, and a willingness to take timely and effective policy measures to counter the adverse effects of the crisis.’. These policies and fundamentals refer to 4 ‘depreciating the Singapore dollar against the US dollar to maintain its competitiveness at the start’, but decided to work towards cost-cutting measures, such as spreading the burden of the financial crisis across every segment of society. 3The government also decided to reduce wages and costs to boost competitiveness. Timings of other government programmes were brought forward, such as the Interim Upgrading Program and various construction programmes. The CPF also decided to cut the amount needed to be deposited by companies to offset labour costs, limiting the impact to local demand as well as disposable income. 3Together with the reserves of Singapore form previous years’ fiscal growth, which allowed Singapore to contribute to aiding other financially-hit countries, Singapore was able to weather the currency storm.

6In mid-1998, the government realized that the deterioration of the Singapore’s economy was far more serious than originally speculated. Hence, it unveiled a S$2 billion off-budget package in June, with three broad objectives.

1. Reduce business costs in through additional property tax rebates, rental and utilities rebates by government agencies.

2. Strengthen the economic infrastructure by speeding up development projects. Also more funds for skill training and local enterprises will be provided through the package.

3. Stabilisation of specific sectors of the economy, especially the property market, through the suspension of government land sales until the end of 1999 and deferring stamp duty on uncompleted properties.

However, another cost-reduction package worth S$10.5 billion was needed to be introduced in November 1998 as the previous package failed to arrest the drop in the real sector of the economy resulting in decelerating quarterly GDP growth rates and rising unemployment. The new package aimed to reduce business cost by 15%. The main components in this package include a

1. 10% point reduction in the employers’ CPF contribution

2. a wage cut of 5 to 8 percent,

3. A 10% corporate tax rebate for 1999,

4. Further cuts in government rates and fees.

6Higher transparency in the financial sector by raising disclosure standards was

also implemented by the Singapore government.to reduce the risk of

unwarranted contagion. Hence, the change in mindset allowed the introduction of several steps to ease restrictions on the use of the Singapore dollar by:

1. Encouraging well-established foreign entities to issue

Singapore dollar bonds in Singapore

2. Allowing Singapore-run firms to borrow Singapore dollars for use outside Singapore

3. Promoting the growth of derivatives based on the Singapore dollar

4. Allowing foreign companies to list their shares in Singapore dollars in the local bourse.

Through the measures taken by the Singapore government, despite managing only to project S$1.1 billion for the fiscal year 1998, Singapore’s competitiveness was restored to almost pre-crisis levels.

Malaysia

7Malaysia was also greatly affected by the financial crisis, as it was the top investment destination at that time and this was shown in KLSE activity which became one of the most active exchange globally.

However, in July, just after the devaluation of the Thai baht, the Malaysian ringgit was “attacked” by speculators. Soon, the effect snowballed rapidly and the Malaysian ringgit fell from above 2.50 to under 3.80 to the dollar.

The aftermath was seen in 1998, when the construction sector contracted 23.5%, manufacturing shrunk 9% and the agriculture sector 5.9%. Overall, the country’s gross domestic product plunged 6.2% In that same year, the ringgit dipped below 4.7 and the KLSE fell below 270 points.

9In September 1998, various defensive measures were announced and employed to halt and overcome the crisis. The first step was to move the ringgit from a free float to a fixed exchange rate regime. Bank Negara fixed the ringgit at 3.8 to the dollar. IMF aid was refused by the Malaysian government, which proved to be smart, considering how it made things worse. Capital controls were imposed as well. The Corporate Debt Restructuring Committee dealt with corporate loans. Various agencies were set up such as: ‘Danaharta, which discounted and bought bad loans from banks to facilitate orderly asset realization and Danamodal, which recapitalised banks.’

8However, things were not all just business in Malaysia. Then Malaysian Prime Minister Dr Mahathir Mohamad angered the American business sector when he blamed currency speculator George Soros for the plunge of the ringgit. Soros, a billionaire who originated from Hungary, has worked closely with the U.S. CIA in the Eastern Europe bloc on numerous ocasions. Soros, whose specialty was in setting up foundations to finance “democratic” news media friendly to the new capitalists. supposedly earned his finances through currency trading.

9Soon, the Malaysian market growth reached a slower, but more sustainable rate Banks were better capitalised and NPLs were realised. Small banks were bought over by their larger counterparts to ensure stability, though the real reason was that these small banks were dissolved to make way for politically-backed ones. However, PLCs unable to cope with its financial affairs were delisted to ensure market stability. Overall, Malaysia managed to survive the crisis, though scathed, as it has not reached pre-crisis highs unlike other East Asian countries.

Conclusion

From what I have learnt, I realise that good governance and forward planning is needed to solve major crises in any country. Both long term and short term targets are needed to be set by a country, and hence some sacrifices are needed to be made. Also, Singapore’s policy making has been generally effective as seen from the financial crisis, as Singapore rebounded back from the setback much faster than its neighbours, like Malaysia.