Although Malaysia is relatively liberal today in terms of its financial system, many weaknesses in the economy and financial system were revealed during the recession of the early 1980s.
In 1982, the government stepped in to bring about more efficient management of the economy while reducing public sector involvement. Measures were introduced, including a soft loan scheme to boost smaller industries and prioritize lending guidelines for commercial banks, which helped reinvigorate the economy in the late 1980s.
This focus on directing funding to priority areas continued for years, even as the liberalization of the country’s financial markets progressed.
Yusof, Hussin, Alowi, Sing and Singh point out in
Financial Reform – Theory and Experience (1994) that Malaysia’s experience suggests governments in financially repressed countries contemplating liberalization should first raise interest rates, ensure the health of banks, and build a strong central bank on both the regulatory and monetary side. This approach, including tight new laws and regulations that enabled the Central Bank to act quickly to give credibility and sustainability to financial reforms, was effective for Malaysia.
Today, Malaysia has no financial repression, as we understand the term. Nominal interest rates are not held at artificially low levels to “monetize” government debt, unlike in mature economies. The nominal rates are artificially depressed as a consequence of easy monetary conditions and unsustainable public debt has imposed significant costs on the private sector.
Government control has given way to a more free-market approach in Malaysia. © 2Agenten
Malaysia never resorted to “deficit financing” of the federal budget, where the central bank is a significant holder of government securities to help finance the budget deficit. Financing the deficit was tapped from non-inflationary sources, backed by flush liquidity in the financial system.
However, Malaysia’s trade flows to the United States and Europe have been on a lower trajectory given the still sluggish recovery after the 2008-09 financial crisis. Export slack from mature economies has been partially compensated by intra-regional trade, led by China.
A gradual global recovery should improve Malaysia’s trade flows to the Western world. Financial repression in developed economies is pushing flows into Asia in search of good returns. In Malaysia, there is strong interest in local properties as it remains one of the few south-east Asian countries with attractive property prices compared to Singapore, Hong Kong and even Jakarta, in Indonesia.
Foreigners now own about 5% of the entire Malaysian property market. Buyers come from Singapore, Indonesia and China, with most preferring property in Johor Bahru and Klang Valley, and particularly Iskandar Malaysia because of its improved connectivity and accessibility as well as its proximity to Singapore.