Were capital controls in Malaysia needed?

Need for capital controls

If a country faces a severe external crisis, particularly one caused by pure

panic, and if orthodox macroeconomic policies have failed to restore
confidence, imposing capital controls may be an effective way to stabilize
the economy. They represented a national safeguard against turbulence in
international financial markets and ensured policy autonomy in interest
rates
Unfavourable changes in external environment: 1997- Thai bhat
devaluation and start of Asian crisis
Even after monetary, fiscal policy tightening
1. Exhibit 6- 1997 (Portfolio investment is negative)
2. Exhibit 6- 1997 : Foreign exchange reserves (20.8 in 1997 from 27 in
1996)
3. Exhibit 6- Total external debt (50.5% in 1997 from 42% in 1996)

The capital controls provided breathing space to pursue economic

adjustment and to accelerate the structural reforms necessary for
sustained economic recovery
1. Malaysian government resorted to capital controls in order to achieve
the greater flexibility to lower interest rates. Interest rate was lowered
to 8.47%
2. Exhibit6: nominal exchange rate is depreciating and real is appreciating
which implies currency is overvalued. Controls with the pegging of the
ringgit contained currency speculation and provided a degree of
certainty to market participants. Hence, Ringgit was pegged to stable
exchange rate 2.5 per dollar
3. Impossible trinity diagram

Stock market and Real Estate Bubble

1. Exhibit 5- 34% lending by banks to property market
2. Exhibit 5- Stock market crash

Failure of development state model: The relationship between firms,

government and banks in Malaysia in the financial crisis period was really
bad and their report of cronyism

Were capital controls effective?

Exhibit 13: Table with all countries (yoy values)
1.
2.
3.
4.
5.
6.

GDP growth
Inflation rate
Current account
Fiscal balance
Import cover
Stock Market index

Exhibit 12b- Interest rate comparison

Long term Negative Impact - Qualitative

1. They created uncertainty for foreign investors and eroded their

confidence. International investors may have begun to view Malaysias use
of capital controls on portfolio outflows as a fundamental correction to its
stated open policy and expect a similar action to be taken in future times
of instability
2. International rating agencies downgraded Malaysias risk and credit
ratings
Exhibit 8: Moody, S&P, Fitchs