Currency Turmoil and the Malaysian Economy: Genesis, Prognosis and Response
Malaysia still has many favorable aspects going for it in the medium to longer term. Much depends on how inefficiencies in the economy can be removed into the handling of the current turmoil by the authorities. The global economy has changed rapidly in the past few years, with growth in trade and financial flows far exceeding most expectations. Boundaries are also becoming increasingly blurred as regions become more closely knit through such flows. This episode of currency turmoil engulfing the East Asia region has come as a shock that no one could have predicted. For Malaysia, it has hit us largely through the contagion effect. But it has also demonstrated to us that there are areas that urgently need to be addressed by policy-makers. Having the will to make these changes and demonstrating resolve in implementing reforms will definitely go a long way in gaining the confidence of markets. It should also be mentioned that policy pronouncement must be consistent, unambiguous and coherent. Co-ordinated effort among the authorities is needed. Confidence can only be restored thus and, at this stage, it is imperative that confidence in the management of the economy by both the local and foreign business communities be improved.
Currency speculators have no doubt contributed to the present turmoil in financial markets. This has resulted in the ringgit deprecating excessively. However, it is to be noted that speculators would not have succeeded had there been no weaknesses in the micro-and macroeconomic fundamentals in the first place. Admittedly. Markets can be imperfect and behave erratically especially where confidence is severely dented. It is thus important to restore confidence as soon as possible. Lack of policy consistency in such circumstances would distort credibility and deepen the crisis.
Policy-makers should view this as a timely period to implement changes that will enhance the credibility of the system and ensure that the economy emerges from this episode more competitive and resilient. Displaying the foresight and courage to do this will no doubt boost the standing of the economy in the longer term in a global economy that present many opportunities but is at the same time increasingly competitive.
Author: Mohamed Ariff, Michael Yap Meow Chung, Azidin Wan Abdul Kadir, Ong Gaik Ean and Elaine Tan Lae-Imm