How we are faring 20 years after the financial crisis
Is Malaysia really better off than other countries?
HER family’s small business collapsed, wealth wiped out, and father fell seriously ill.
In the aftermath of the Asian Financial Crisis of 1997/98, Caely Lee (not her real name) and her family went from a life of comfort and security to one plagued with hardships and anxiety for the next 10 years.
To Lee, now 34, the impact of the damaging financial shock had been deep and lasting, as it went beyond the economic well-being of her family who used to own three clothing shops in Kuala Lumpur.
The crisis, as Lee reveals, had also affected her family’s relationship with their relatives.
“Our relationship with some of our relatives turned sour, as some of them started to avoid us after knowing that we were deep in debt following the collapse of our clothing business, which used to enjoy brisk sales before the crisis struck,” Lee says. “It took us more than 10 years to rebuild our lives and settle all our debts … and with my siblings and I now working in the marketplace, earning relatively stable income to support the family, life has subsequently become financially less stressful for us.”
However, Lee argues, that does not mean she feels they are increasingly better off than they were 20 years ago, as the constant worries about the rising cost of living and increasingly limited opportunities for career advancement continue to cast a shadow of doubt about the future.
Similarly, for 50-year-old financial controller Abu Hashim (not his real name), the concern about the rising cost of living in Malaysia has made him feel that he is not getting better off.
This is despite him being among the lucky ones to be able to build his career and climb the corporate ladder during the crisis years.
“If you ask me now, I will definitely say I’m not better off … even though I earn more now, I feel my purchasing power is getting weaker,” Abu Hashim says. “Yes, our economy is growing, but some people like me, may feel we are not benefiting much directly from the progress, as we feel it is not reflected in our purchasing power.”
Indeed, much has changed since the turbulent days of the AFC.
While it is undeniable that the Malaysian economy has made strides since recovering from the damaging regional financial crisis – and then, the 2008/09 Global Financial Crisis (GFC) – as key economic indicators suggest, the sentiment on the ground may not necessarily agree with the notion that the general populace is better off now compared with pre-crisis era.
According to Dr Yeah Kim Leng, the decline in purchasing power, caused by the weak ringgit and rising cost of living, is a major cause of discontent. The Sunway University Business School professor of economics, who is also an external member of Bank Negara’s Monetary Policy Committee, points out that although Malaysia’s per capita income has increased, which means, on average, the living standard of the people has improved, the sense is that the economic progress has not been well-distributed.
“Economic progress has not filtered down much to the bottom 40% (B40) of the country’s population. This group will probably argue they are worse off, whereas some in the middle 40% (M40) income group and top 20% (T20) income group may feel they are slightly better off,” Yeah explains.
Yeah argues that while a sizeable number of Malaysian population has attained middle-class status, as the country’s economy expands over the years, most people in the country still have to face the rising cost of living and the impact of weak ringgit.
“The general sense is that although household nominal income has increased, the people’s purchasing power has declined due to the rising cost of living and weak ringgit,” he says, noting that household income growth has not been able to keep pace with the rising cost of living.
Economist Lee Heng Guie concurs. The executive director of Socio-Economic Research Centre (SERC) notes: “There are pluses and minuses for the economy, businesses and Average Joe.”
“Malaysia’s income per capita has improved to about US$10,060 (RM43,060) in 2016, effectively pulling us out of the middle-income trap. But, the B40 and middle-income households in the urban areas continue to feel the heat of rising cost of living,” Lee argues.
According to economists, there are many factors that have contributed the the rapid increase in cost of living.
For one thing, the weak ringgit has made prices of imported goods more expensive – and Malaysia is highly dependent on imported foodstuff, among other things.
For another, the Government has in recent years started restructuring the country’s economy to cut its fiscal deficit and the national debt. Among the notable measures implemented include subsidy rationalisation and goods and services tax (GST) – both measures of which caused prices of many goods, including essential ones, to increase.
In addition, there is the impact of ultra-loose monetary policy in developed economies in response to GFC. For instance, the US Federal Reserve’s printing of money through quantitative easing programmes between 2008 and 2014 had contributed to the significant rise in global commodity prices as well as prices of assets, including properties, in Asia.
According to Lee, the general price level of goods in Malaysia has declined even though the consumer price index (CPI), a gauge of inflation, suggests otherwise.
“It is an undeniable fact that the GST and its spillover effect, coupled with other indirect cost-induced pressures, have caused a collateral damage on the pocket of the Average Joe,” Lee says.
“Worse still, households have leveraged more now despite Bank Negara’s effort and determination to keep a tight rein on unsustainable debt-financed consumption,” he adds.
As for the private sector, Lee notes the business landscape has gotten more complex compared to the environment of 20 years ago.
“Businesses now face a daunting business environment, owing to the subsidy rationalisation and GST, as well as other regulatory changes,” Lee says.
“This is inevitable, as radical economic reforms are necessary for the Government to maintain fiscal sustainability and strengthen the country’s economy,” he adds.
In the run-up to AFC two decades ago, many obvious dangers had been overlooked.
Pre-crisis, Malaysia enjoyed “stellar” growth rates, averaging at 9.2% per year between 1992 and 1997. The country’s stock market was in a “super” bull run, and foreign money was pouring in.
The positive wealth effect on the general populace was obvious.
According to Yeah, had it not been the AFC, Malaysia would have achieved its Vision 2020 to become a high-income economy much earlier.
But a deeper analysis, he concedes, would suggest the pre-crisis very high growth rates of the country were unsustainable.
Like many regional countries affected by the AFC, Malaysia had over-invested in unproductive sectors, resulting in imbalances in the real estate and stock market. Corporations were over-leveraged, Malaysia’s current account was in deficit, and its foreign exchange (forex) reserves were low, making the country vulnerable to contagion risk.
The first sign of trouble emerged in Thailand, with the sharp fall in the baht, in early July 1997. The domino effect rippled through the region, dragging Malaysia, Indonesia and South Korea as well as Hong Kong, Singapore and the Philippines into the maelstrom.
Thailand, Indonesia and South Korea resorted to the International Monetary Fund (IMF) for assistance in exchange for tough economic reforms. Malaysia resisted IMF’s hand, and went on to implement its own capital-control measures and currency peg, with ringgit fixed at RM3.80 per US dollar from September 1998 to July 2005, to brace through the storm.
And to be fair, although economic reforms had been slow in coming, Malaysia has over the past two decades implemented critical measures to strengthen its economic fundamentals and financial system, making it less vulnerable to external shocks, economists say.
For instance, the country has built up its forex reserves and its capital account is in surplus. The economy is also less dependent on external debt, which is denominated in foreign currencies.
“Our economy is fundamentally stronger. Our sources of growth in terms of exports market and products structure are more diversified, and the financial sector is in good shape and our capital market is well developed,” Lee says. “The federal government’s balance sheet is also being repaired gradually from 2009, while both direct debt and contingent debt are under close surveillance.”
Similarly, Yeah points out that the improvement in Malaysia’s economy has been proven by its relative resilience to the impact of the GFC about 10 years ago.
“We managed to mitigate the shock of GFC; the recession we faced was relatively short and relatively shallow… our relatively quick recovery from the impact of GFC was indication of the resilience of the economy,” Yeah says.“Had we not taken the effort to improve our economy in the 10 years preceding to the GFC, the impact on us would have been deeper and more serious,” he adds.
According to Yeah, while Malaysia’s growth rate has moderated to around 4%-5% over the last 20 years since the AFC, the pace is more sustainable and healthy for the country.
Meanwhile, Tan Sri Ramon Navaratnam says while Malaysia’s economy may now be in a stronger footing, it cannot afford to rest on its laurels and disregard the dangers lurking in the global economy. “We are better off in the sense that we have learnt our lessons and introduced policy measures and reforms that have helped strengthen our resilience and fundamentals since the AFC,” the chairman of Asli Center of Public Policy Studies says.
“But we cannot be complacent because the global economy is still fraught with uncertainties, and with the changing trends and growing digital economy, we have to be more competitive, less protective and more liberal,” he adds.
Applauding Government’s investments in public amenities and services such as healthcare and transport that have improved the life of the rakyat, Ramon says, the Government still need to aggressively address the challenges faced by the people, especially in terms of the rising cost of living.
“Rapid urbanisation has contributed to the problem of inflation and rising cost of living, which is putting a lot of pressure on lower income group,” Ramon explains.
“There will be growing dissatisfaction among the certain segment of the populace when they cannot cope with the rising cost of living,” he says. In addition, Ramon points out that, the problem of unemployment among the young graduates, who are finding it difficult to find employment, is a growing concern.
“There has been too much emphasis on GDP growth rates; we must look at how to translate this progress to truly benefit the man on the street, otherwise we will have good economic growth but no happiness,” Ramon says.
Emphasising the need to address social issues to make life better off for the many Malaysians in the country, he says: “We must grow faster in NEM (new economic model) and phase out NEP … we should promote greater nationality and fairness to all races; there is no room for racism and bigotry as these will undermine our progress.”