Malaysian Economics: Financial sector

 5. Explain the Impacts of the Global Financial Crisis in 2008 and also the global economic crisis due to COVID-19 pandemic in 2020 on the financial sector.

    The troubles in the US financial system, which began in mid-2007, were caused by a decline in the quality of subprime assets.  The bankruptcy of many major US and global financial institutions in September 2008 sparked widespread fears of systemic disruptions in global financial markets, leading to the ‘freezing’ of interbank and credit markets in numerous financial centres across the world.  This situation has had numerous detrimental consequences, particularly for other developing countries such as Malaysia.

    The global recession has had an impact on Malaysia’s international commerce sector.  Malaysia has practised an open economic approach.  The recession in advanced economies began to influence the Malaysian economy in the fourth quarter of 2008.  Exports were down 7.4%, and industrial output was down 11.1%, respectively.  In addition, declining business circumstances stifled private investment.  However, strong domestic demand, particularly personal spending, kept the economy from falling in the fourth quarter of 2008.  

    According to capital flows data, Malaysia has experienced capital flight since the second quarter of 2008.  Banks and financial institutions in the United States and Western Europe cut back on international activity and concentrated on domestic markets.  The amount of money moving into Malaysia has decreased dramatically, with net financial and capital flows falling from RM37.7 billion in 2007 to RM118.5 billion in 2008.  Then there’s the direct investment sector, where FDI into Malaysia dropped 98 per cent from RM15.9 billion in the second quarter of 2008 to RM0.3 billion in the third.  In 2008, FDIs declined by 17% for the entire year.

    However, even though the COVID-19 pandemic has hit Malaysia, the effect is not as severe as the Global Financial Crisis in 2008 did.  According to the Economic Outlook 2021 by the Ministry of Finance, the country’s monetary and financial environment remained strong throughout the COVID-19 pandemic and supported the economic recovery.  The government has implemented a monetary policy that provides additional stimulus measures to maintain the momentum of economic recovery.  These operations were driven by vibrant money and foreign exchange markets as well as intermediation activities.  According to Bank Negara Malaysia, the institution has lowered the overnight policy rate (OPR) consecutively by 125 basis points (bps) in the first seven months of 2020 to 1.75 per cent, the lowest level ever recorded.  Furthermore, interest rates in the banking system have been reduced in line with the reduction in the OPR since January 2020.

    BNM (2020) reported that the banking sector remained strong and orderly as it was supported by adequate liquidity and capital buffers.  The capital market will continue to be resilient with the impetus of good existing infrastructure and instruments.

    However, lending activity showed a downward trend.  This situation is driven by cautious sentiment toward global and domestic growth prospects.  In the seven months, loans sanctioned and disbursed fell by 22% and 7.3 per cent, respectively, to RM185.5 billion and RM657.1 billion.  At the end of July 2020, loan approvals to firms were down 12.5% to RM80.7 billion, while loan approvals to consumers were down 30% to RM88.9 billion.  According to the report, the rise was mostly due to a large drop in Gross Domestic Product (GDP) in the first half of 2020, with most of the debt consisting of loans for the acquisition of residential properties.

    To conclude, the challenges faced in the financial sector in Malaysia can be well overcome if the government can formulate a comprehensive strategic policy, especially by considering the private sector, which is the driver of economic growth.


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