Malaysia's impressive decade-long growth record came to an
abrupt halt with the depreciation of the ringgit, which occurred within two weeks
after the floatation of the baht on July 2 1997. The fall of the Thai baht raised
concerns about the resilience of the exchange rate arrangements in the region.
Buoyed by the success and profits associated with the floatation
of the baht, currency speculators next focussed their attention to the other regional
currencies with renewed vigour. The peso was floated on July 11, while Indonesia
allowed the rupiah to fall sharply within the official intervention band on July
21.
Initially, Malaysia tried to defend the ringgit when it came
under attack, but this strategy was not sustainable and proved costly. On July 14,
the ringgit was allowed to depreciate. From RM2.50 to US$1, the ringgit slipped to
RM2.61 (July 14) and gradually to RM2.72 (August 11) and RM2.83 (August 12), before
reaching RM3.00 on September 2. The ringgit sank to an intraday low of RM4.88 on
January 7, 1998, before recovering along with the regional stock market rally after
the Chinese New Year/Hari Raya Puasa holidays. Following poor local corporate performance
and negative developments in Japan, the ringgit weakened and reached RM4.16 on 8
July 1998.
The turbulence at the Kuala Lumpur Stock Exchange (KLSE) was
closely tied to the ringgit depreciation. Although the KLSE started declining in
the early part of 1997, the fall grew in earnest after Thailand announced the floatation
of the baht (See Figure 2 and 3).
In order to prevent currency speculation, in early August 1997
Bank Negara imposed a US$2 million limit on outstanding non-commercial-related ringgit
offer-side swap transaction with any single foreign customer. This was later followed
by KLSE declaring the 100 component stocks of the KLCI as ėdesignated securitiesķ.
The short-selling in the stock market was suspended through the prohibition of securities
borrowing and lending. Local funds were encouraged to start buying up shares at the
time when foreign funds were retreating.
The series of measures adopted in August failed to stop market
panic. From the high of 1271 level in 25 February 1997, the KLSE composite index
plunged to 477 points on 12 January 1998, with a loss of about 800 points or 63 per
cent. At the high in 1997, the market capitalisation (comprising the main board and
the second board) was RM917 billion but sank to RM308.69 billion by 12 January 1998.
The KLSE composite index recovered briefly with the Chinese New Year/Hari Raya rally
and rose to 745.12 on 2 March 1998. Since 2 April 1998, the KLSE CI started falling
again with reports of poor corporate performance as well as the depreciation of the
yen in mid-May. The KLSE composite index was 467.55 on 7 July 1998.
