Similarities Differences Between Asian And Global Financial Crisis Economics Essay

Similarities Differences Between Asiatic And Global monetary Crisis economics EssayAsia Financial Crisis (AFC) in 1997 was started with devaluation of Thailands baht and followed by Ringgit Malaysia, Philippine Peso, and Indonesian Rupiah. There were many causes of the crisis such(prenominal) as South eastern United States Asia new account deficit, overvalued assets tolls, subversive activity and macroeconomic policy mis press and redundant adding. to the highest degree of South East Asia Countries was facing current account deficit, some countries had 5% above gross domestic product. They solved this deficit by attracting inflows of investment from overseas, regularly on short term investment. This is because pecuniary deregulation and working metropolis liberalisation in the west countries, so it began to persuade developing countries to adopt free tradeplace as well. Then, opposed investment ostensibly superb for economic respect adequate to(p) actually not, the problem is not from free movement of large(p) until now that the country go forth be very bloodsucking on overseas short term capital flow. Short-term borrowing (i.e. loans of little than a years duration) meant there should be had liquid assets in the camber buildings account it for go bad causes motivating a large detonate of their capital inflows were increasing the lending mark, which lookly some of domestic cusss actively seek irrelevant notes from the West to finance the lending with the consequences country provide facing excess lending.Secondly, the weakness of the South East Asiatic economies was not practically overvalued their assets come upon them weak to a quick depression. In Thailand property market fix the weakness of fiscal welkin, according to Robert Chote (1998) Thailand assert had lending funds to non argot financial fundament, which is property market investors. It is approximation quarter of bank in Thailand, Indonesia and Malaysia was lending their funds through intermediaries for property related investment.The third causes of AFC has been the privileged factor of each developing country that is badly ill of corruption and does not handle capital market in a transp arncy, there was insufficient regulatory framework in barter especially for the bank in South East Asia. For example in Indonesia, banks would never pass up to lend money to businesses have relation with the influenceer president Suharto family, the lenders just think those borrowers would be able to repay the debt, even the investment failed.another(prenominal) factor was macroeconomic policies, which is pegging domestic silver to the US dollar sign had evidentiary consequences, by maintaining the fixed dollar number among South East Asian economies in effect caused their currencies to appreciate. Then, when the crisis was develop the inflation of the US dollar constitute some trouble to those countries facing large deficit, b bely it wo uld to a fault make it harder to fund their deficit.Therefore the effect of AFC will be alter in Asia and to the global market.In the Asia region, one of the distinct effects has been the devaluation in the value against US dollar and usually the economy performance buttocks be seen in stock market, which is the country in crisis will feature quick drops in the stock market because stock market would be presumable to fall reflect the lower anticipated profit. Another reference of the financial crisis was interest post will rise rapidly to bar further devaluation of the currencies, for example in Indonesia they raise overnight interest rate to 300% in 1997, but still failed to stop convert rate from collapsing.In Malaysia, the stock and the currency market nearly collapses and to a fault GDP harvest-festival rate dropped from 7.3% to negative 7.4%, but the economy characterises recover in 1999.The global daze of AFC economic turmoil is expected to give effect of some down turns in economic growth since the crisis began. The devaluation of South East Asian currencies will decrease the place for western sinceres which are making the goods to a greater extent expensive to obtain than usual. except, the positive consequence is the growth of exporting from major economies. Another contact in devaluation of currencies will give trade emolument to South East Asian companies, but the cost to acquiring assets will be increased as well, as a consequence, foreign direct investment will drop.Compared with current Global Financial Crisis (GFC), the causes of GFC are cerebrate to the turn down of financial markets. In US, banking industries has been affected by subprime mortgage trend which is much likely from real estate. correspond to Krugman (2009) the crisis growth from admit crisis to banking crisis are very fast.The impact GFC in financial institution in developing countries in Asia, in fact the financial institution in developing country relati vely unaffected as they have good track record on borrowing and lending process so, it will help to besmirch the risk.Then general recommendation, for financial institution would political relation activity should make clear regulation, then by funding market and encouraging trouble assets market it will give liquidity to bank. Because this is a global issue, it may require cooperation other countries to make solution.In case of GFC, Asian economies will move slowly, it is because most of the countries dependant to foreign demands, therefore when US and west countries struggle it relatively will give effect to Asian countries. But, since AFC most of Asia countries have good fundamental in their economy but policy adjustments for each country to adapt the situation are necessary.The impacts of GFC in Malaysia are in foreign exchange rate, finance sector, banking sy source and trade. transfer rates in Malaysia since de-pegging in from US in 2005 have impact to capital flow to the Ringgit (Ooi, 2008), this depreciation in Ringgit value is related to the demand of portfolio flow and export sector. This will help Malaysia to improve their export for take global recession.In finance sector, Malaysia have suffered big impact on capital flow because US financial institution more commercial enterprise to their domestic market, and in capital flow portfolio is the one most volatilizable. In Malaysia stock exchange, many foreign players involved then when the crisis, many foreign participants take their part back, and affecting to the stock market in KLCI. fit in to Bank Negara Malaysia (2008), low debt repayment by private sector and formal sector cause decreasing in direct investment.The impact on banking system was quite on a lower floor control as local banks had slender correlation with US subprime loan, and also local bank have intentional from AFC in 1997.For trade, there has big impact in Malaysia because of very dependent in the world market, in 2009 Malaysia made biggest drop in export rate including in manufactured export, electronic, agricultural and natural resources export. Malaysias exports have a high relation with their import. So when exports decrease, imports also decrease.In conclusion, AFC give good fundamental Asian countries when facing GFC. Then both of the crises always give global impact in economics to all countries in the world, and as financial crisis all financial market will be affected. The differences are just the volume of the impact and how they will find the solution to bang their problem.QUESTION 2Discuss in detail on the impact of Capital Control imposed by the Malaysian Government in 1998 on the economy in general, giving special consideration on the pegging of Malaysian Ringgit against USD.In 1957, Malaysia adopt floating exchange rate that unless volatile around RM 2.50. During the floating exchange rate in 1991 1997, the growth of GDP in Malaysia was higher and was calculated approximately at 9.2 portion a year. On the other hand, during the financial crisis, the economic growth became negative. Moreover, in 1999, the growth started to recover from -7.6 per a year to 6.1 percent a year. This condition bath be happened collectable to the investors confidence has recovered and the business started the refinement movement (Talib, nd).Financial crisis in 1998 caused catastrophe to countries in Asia, such as Indonesia, South Korea, Thailand, Philippines and Malaysia. In those years, every country in Asia was preventing itself from the crisis by antiaircraft method. It is also followed by IMF term that every country has to tighten their capital and exchange control. This action is taken due to ensure the investors confidence and stem capital outflow. On the other hand, Malaysia challenged it by imposing restriction on capital repatriation by foreign investor and on offshore trading of ringgit-denominated assets (Sharma, 2003).According to Sharma in The Malaysian Capital C ontrol Regime of 1998, she stated that due to capital control, it downturn the economic in Malaysia. For example, export in electronic especially showed low demand and rises of lower cost producers. She added also that the price of the residential and commercial property increase. Moreover, subsidies are privationed in industries, such as automobiles, cement, steel and others. But the troublesome is the falling in the assets spirit of the bank because of the uncontrolled rapid credit expansion that made conceptional price bubbles happened. Also there was difference in assets and liabilities that made the market vulnerable and seriously exposed. So, when financial crisis in Asia happened, Malaysian Ringgit became very volatile and the trading of Ringgit against USD at RM 4.22 per 1 USD. Thus government made decision to peg the Ringgit with USD at RM 3.82 per 1 USD.The Malaysian government not wholly concern about the economy in Malaysia but also the realistic pegging of Malaysi an Ringgit against USD. At that time Malaysian Ringgit weakened against USD, this is because the unlimited currency trading market. Many speculators that short or sell the Malaysian Ringgit in case of depreciated (Sharma, 2003). Malaysia also imposes restriction on exchange rate consummation to prevent speculator take position against ringgit and also to foster foreign exchange reserves and recover monetary. The process of recovery not just now by pegging and controlling the currencies Bank Negara also take a part to support the process of recovery, they impose stretched limit on transfer of capital to foreign countries by residents, the central bank maintains its commitment to exchange rate stability and rules out revaluation, broad capital inflows translate into a massive increase in the domestic money supply, leading to suspected undervaluation and inflationary pressure this decision was to prevent potential escape or battalion try to cheating.The Governments declaration of a guarantee of bank deposit also carries positive effect in Malaysia. In conclusion, Malaysia was able to control the Asia Financial Crisis in 1998, with the collaboration all other sectors including Government and financial institution by designing effective capital control and effective enforcement which are showed political ability and outstanding institutional.QUESTION 3Based on your understanding of the Financial System in Malaysia, critically argue on how we could minimize the impact from another catastrophic economic crisis (if any).The Malaysian financial system was insecure during the Asian financial crisis. This encouraged the government to take holistic approach towards financial restructuring.It has been shown in paper4-emerging issues in Malaysian financial system policy and challenges (2005) the government took approaches to restructure which includes the establishment of Danaharta, Danamodal and CDRC (Credit Debt Restructuring Committee) and promoted consolidation wit h liquify exercise. Within 2 years, Malaysia managed to get out of the crisis with low usage of existence funds (less than 5% of GNP) for the restructuring efforts and restoring economic stability. The government realized that the financial sector has to be transformed to address inherent weakness and set al-Qaida for longer term development efforts amidst intense competitive pressures, globalization and liberalization of financial markets.How to cope with the crisis can be in various ways. But the initial priorities in dealing with the crisis were to stabilize the financial system and to situate confidence in economic management. Strong actions were needed to stop bank runs, protect the payment system, limit central bank liquidity support, and minimize disruptions to credit flows, maintain monetary control, and stop capital outflows. According to the financial sector crisis and restructuring lesson from Asia, it suggests that the countries emergency measures, such as the introd uction of blanket guarantees and bank closings, were accompanied by comprehensive bank restructuring programs and supported by macroeconomic stabilization policies. Blanket guarantees for depositors and creditors were used in Malaysia to restore confidence and to protect banks funding. Despite the huge contingent costs and moral hazard problems involved, the government opts to guarantee the deposit rather than risking the credibility of their banking systems. The guarantees were effective in stabilise banks domestic fundingalthough in some cases it took some time to gain credibilitybut were less effective in stabilizing banks foreign funding where Malaysia adopted capital controls. The developments within the domestic economy such as embarking on expansionary pecuniary policies, easing monetary policy, implementing capital controls, and fixing the exchange rate can help to lead an improvement in the Malaysian economy.A well-functioning and economical financial system is vital in ensuring effective and efficient conduct of monetary policy. The need to hit information technology will progressively be important to invite more difficult demand. Banking sector involve large amount of capital investments to remain competitive and be able to assume greater risks. The financial system must adapt to meet the changing requirements for financing new economic activities. In particular, new areas of growth have different characteristics, which may limit their access to the traditional form of the bank-based financing. The capital market will play an important role in financing the growth and businesses.In order for Malaysia to remain internationalisticly competitive, some of the important challenges will include such as continuing to stick to Liberalization, Foreign Direct Investment, Building Good Governance and an Ethical regulatory Framework, Restructuring and Upgrading the Industrial and Technological Base.In terms of the foreign exchange, Malaysia can get adva ntage by pegged exchange rate during the crisis. This brings advantages such as copulation stability in the foreign exchange market, Avoiding the day-to-day management of the exchange rate, The fixed exchange rate provided more certainty for businesses to make business and pricing decisions, Fixing of the Ringgit against the US dollar resulted in some liberty in setting the level of interest rate, Avoids a trade-off between an accommodative monetary policy to avoid a contraction of the economy, and the need to check further deterioration in the Ringgit exchange rate.Comprehensive bank restructuring strategies in Malaysia sought to restore financial sector reliability as soon as possible, and at least cost to the government, while providing an detach incentive structure for the restructuring. The strategies included setting up appropriate institutional frameworks, removing nonviable institutions from the system, strengthening viable institutions, dealing with value-impaired assets , improving prudential regulations and banking supervision, and promoting enhancer in financial market operations.According to the IMFs publication, more transparency in macro and microeconomic data and policies would have exposed vulnerabilities earlier and helped diminish the crisis. Better regulatory and supervisory frameworks would have helped, but supervisors would most likely not have been able to take necessary actions in the heart and soul of the economic boom. No one foresaw the sudden massive erosion of loan values, once market sentiment changed and exchange rates collapsed. Broad-based reforms are under way to strengthen the institutional, administrative, and legal frameworks in the crisis countries, based on evolving international best practices, codes, core principles, and standards. The crisis has shown the need to tailor prudential policies so that resiliency is built up in times of economic booms to deal more easily with inevitable economic downturns. Internation al efforts have been undertaken to reduce the likeliness and intensity of future crises. Initiatives include work on the international financial architecture, the Financial Stability Forum, and financial sector stability assessments. The Basel Committee on Banking Supervision has formulated improvements to regulation and supervision of international lenders to address weaknesses that contributed to the Asian crisis.