The Search for a Framework
ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai and Mario B. Lamberte
Chapter 12: Managing Capital Flows: The Case of Malaysia
Kee Kuan Foong INTRODUCTION 12.1 The Malaysian economy has recovered solidly since the 1997–98 financial crisis; the recovery was made possible by numerous reforms as well as favorable external conditions. Ongoing reforms in the financial sector have made the economy more resilient. Operation of the securities markets is more efficient and the level of corporate governance enhanced. The banking system’s delinquencies and exposure to double mismatches have been reduced. Smaller banks were merged with larger and more capitalized ones. Better risk management and prudential regulations were also implemented.1 Distressed firms were either shut down or merged with stronger ones. Moreover, the exchange rate is increasingly flexible (McCauley, 2002). From 1999 to 2007, Malaysia has generated a current account surplus, attracted a fair amount of foreign capital, and accumulated large international reserves. The last factor may act as a precautionary device to prevent speculative attacks on Malaysia’s currency, given its highly opened economy. While the running of a positive current account may tend to replace depleted foreign exchange reserves after the crisis, a recurrent current account surplus of more than 10 per cent of GDP may indicate excess savings over investment. This is also evident by the downward trending loan–deposit ratio of the banking system. A persistent current account surplus also shows that the economy is driven by exports, with the domestic sector being anemic. A more dynamic domestic sector would lead to a smaller current account surplus through higher domestic consumption and investment. While strong economic growth and...
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