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KUALA LUMPUR: The former governor of Malaysia’s central bank, Bank Negara Malaysia, has said that the challenges presently faced by the ringgit are different from what it faced during the Asian Financial Crisis in 1997.

After the fall of the Thai baht in July 1997, the Malaysian currency also came under speculative attacks. But the then prime minister Mahathir Mohamad refused a bailout from the International Monetary Fund (IMF) and instead imposed capital controls in 1998.

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Zeti Akhtar Aziz, who helmed Bank Negara Malaysia from 2000 to 2016, recounted Malaysia’s experience during that turbulent period and the lessons that were gained from then.

What do you remember most about the Asian Financial Crisis?

Dr Zeti: I remembered wave after wave of speculative attacks on the ringgit, and that went on for more than one year.

It was very challenging and we suffered a major economic contraction in 1998, we were prepared for the worst. We saw we needed to ensure economy continue to grow, we didn’t raise rates as recommended to us.

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Danaharta was set up as an asset management company, while Danamodal was set up to recapitalise banks and we had an orderly management of carving out the bad assets, merging the good part of a bank with another bank and so on.

What was distinctive about what Malaysia did was we did not just deal with financial institutions (to ensure they continued to supply credit), but also with the borrowers; we brought them together to discuss debt restructuring.

Would you say Malaysia had a soft landing compared to its regional peers?

Dr Zeti: The cost of the crisis for Malaysia was one of the lowest in the world. This preemptive action that was taken contributed to that the fact that we didn't raise interest rates it was recommended to us by IMF.

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We had a lot of pressure to raise interest rate by 5 per cent and Malaysia decided that would not be a solution, as it would not contain the speculative attack on the currency.

Secondly it would damage the economy immensely. Of course it didn't mean Malaysia didn't suffer the pain: for one year we suffered a major economic contraction.

Never before in our history had we experienced contraction, the economy contracted by 7 per cent in 1998. But because of all the measures we took, the economy grew by 7 per cent the following year; it was a rapid “V-shaped” recovery.

Tell us some of measures that are in place to ward off next crisis

Dr Zeti: You need to have a circuit breaker to stop the currency from collapsing, restore stability to allow other policy to take place.

Like any circuit breaker, the one we imposed in 1997 was temporary. It was removed after one year. Nobody believed we would remove after 1 year – but we did.

People said we “trapped their money”; I said we did it in the interest of investors as well, because at that time it was implemented, the stock market collapsed from more than 1,000 points to 262.

When we lifted control 12 months later (in 1998), its value was enhanced, the measures restored stability and functionality of the market.

Is Malaysia in a better position now to weather the next financial crisis?

Dr Zeti: Right now we have ability and capability. What we have in place now is our surveillance mechanism: we know well before hand where the funds flow from.

We didn't have this real time info in those days. Now we have real time information on where the flows coming from - so the market and our institutions can intermediate these flows, which are much larger than we experienced during financial crisis

What’s the important lesson that Malaysia's learnt from Asian financial crisis?

Dr Zeti: To build our resilience that’s in essence because we are going to see this capital flows time and time again; we are going to see crisis happening again and again.



We will not be able prevent crisis therefore how do you become resilient? The key is to strengthen your foundation, improve capability of surveillance and capability of managing the crisis.

Twenty years on, the ringgit is now back in the 4 ringgit range, below the ringgit 3-80 peg. Are the challenges facing the ringgit now different from during the Asian financial crisis?

Dr Zeti: Yes things are different. The ringgit certainly does not reflect our fundamentals but fundamentals aren’t the only factors that determine the level of currency.

Sentiment, confidence and sometimes contagion affect currency. Right now it would take something very positive to move it to a stronger level. If confidence is restored that will be a factor that take us out of trading range.

What would it take to restore confidence?

Dr Zeti: Well, there are many factors. It's very challenging to rebuild confidence.

You can lose confidence in a short period of time - and to regain it, it requires time, rebuilding of trust and the rebuilding of every aspect to bring confidence to country and economy.

But the point that needs to be recognised is we do have the capacity, we have the capability to manage the concerns to see a country through any challenging moment. We are in a state of preparedness.