A series of policy measures were adopted to deal with the financial
crisis and stabilise the economy. The 1998 Budget and the 5 December package of policies
contained measures to reduce current account deficit, strengthen balance of payments
and fiscal account, improve competitiveness, and increase monetary and financial
stability.
The 1998 Budget announced in 17 October 1997 encompassed the
following measures:
- Reduction of Federal Government expenditure by 2 per cent,
deferment of mega projects, and review of public agenciesí purchases of foreign goods.
- On the financial aspect, the prudential standards were strengthened
with the classification of non-performing loans in arrears from six to three months,
greater financial disclosure by banking institutions, and increasing general provision
to 1.5 per cent.
- The Credit Plan was introduced to limit overall credit growth
to 25 per cent by the end-1997 and 15 per cent by end-1998. In providing loans, banking
institutions were to give priority to productive and export-oriented activities.
On 5 December 1997, the Government announced an additional
package of policies when the regional instability proved to be more protracted than
earlier anticipated. These policy measures were aimed at strengthening economic stability
and instilling confidence in the financial system. There were concerns about the
large current account deficit and high private sector debt amounting to 169 per cent
of GDP in 1997. Hence, there was the need to prudently manage public sector finances
while curbing excesses in the private sector. The policies are as follows:
- Reduce the current account deficit to 3 per cent of GNP in
1998.
- Trim Federal Government expenditure by 18 per cent in 1998.
- Stricter criteria for approvals of new reverse investment,
and defer the implementation of non-strategic and non-essential projects.
- More emphasis placed on good corporate governance.
- Enhanced disclosure of information of corporations and closer
scrutiny for corporate restructuring.
In February 1998, the following measures were announced:
- Bank Negara Malaysiaís three-month intervention rate was raised
from 10 per cent to 11 per cent.
- The statutory reserve requirement (SRR) reduced by 3.5 per
cent of eligible liabilities to 10 per cent.
The National Economic Action Council (NEAC) was established
on 7 January 1998 as a consultative body to the Cabinet to deal with the economic
problems. The purpose of the NEAC is to make recommendations to the Government on
how to restore the economy and prevent it from going into a recession.
In 24-25 March 1998, the Government adopted pre-emptive measures
to counter emerging financial problems by making it necessary for banks to shore
up their capital-adequacy positions at the first sign of trouble. The structural
reform in the financial sector includes more transparency and disclosure for banks
and companies. Although government expenditure was reduced by 18 per cent, Malaysia
would accept a RM$1 billion loan from the World Bank for social and poverty-related
projects. The main measures adopted are as follows:
- Bring loan classification standards (including 3 months for
non-performing loans) to best practice.
- Require 20 per cent provisioning against the uncollateralised
portion of substandard loans.
- Increase minimum risk-weighted capital ratio (RWCR) of finance
companies from 8 per cent to 10 per cent with interim compliance of 9 per cent.
- Increase minimum capital funds of finance companies from RM5
million to RM300 million and subsequently to RM600 million.
- Expand capital adequacy framework to incorporate market risk.
- Reduce single customer limit from 30 per cent to 25 per cent
of capital funds.
- More intensive and rigorous supervision including conducting
monthly stress tests on individual banking institutions.
- Aggregate statistics on non-performing loans (NPL), provisions
and capital position of commercial banks, finance companies and merchant banks. Financial
institutions are to report and publish key indicators of financial soundness, such
as NPL, capital adequacy etc., both at bank level and on consolidated basis.
