THE MALAYSIAN FINANCIAL CRISIS: ECONOMIC IMPACT AND RECOVERY PROSPECTS BY MOHAMED ARIFF AND SYARISA YANTI ABUBAKAR According to this article, the following are some of the consequences of the Malaysian crisis: 1. Impact on Trade The improvement in external demand is largely boosted by the weak ringgit. In In the early days of the crisis, trade was dampened as export demand by economies across the region fell. dollar terms has shown some signs of recovery, and in fact, since the last quarter of 1998, has be- come positive. dollar terms, increased for the first time, after many months of continuous fall, in December 1998.8 In particular, imports of intermediate goods have increased. Although these are implications for the trade balance, this development is favorable light as it indicates rising external and domestic demand. dollar. Imports, in U.S. Recently though, export growth in U.S. 2. Impact on Business Confidence Levels To a certain extent, the findings reflected a cautiously optimistic sentiment among the survey respondents. In the case of the fixed exchange rate, the survey showed that it had certainly been effective in reducing the instability caused by the fluctuation of the exchange rate. Nevertheless, the majority (85 per cent) indicated that they planned to maintain their level of investment in the next one-three years, although a number of respondents expected some slowdown in foreign investments (MIER 1999b). However, slightly more than half of the companies surveyed expected an increase in their transaction costs and bureaucratic red tape. 3. Impact on Industrial and Manufacturing Sector In addition, the index of industrial production (IIP) has recently showed some positive growth. In all probability, industrial production in general and manufacturing in particular will record a significant increase in the second and subsequent quarters. The performance of the manufacturing sector has been particularly encouraging with higher sales recorded due to improved domestic demand. Given strong evidence of increased demand, the shrinking IIP suggested that manufacturers were instead opting to run down their inventories instead of producing more. Based on the first quarter 1999 results of the business conditions index (BCI) which registered a 3.5 point increase to reach 48.5 points, there seems to be a significant turnaround in domestic demand and business confidence. 4. Impact on Monetary Policy Following the adoption of an easier monetary policy, as mentioned earlier, the statutory reserve ratio (SRR) requirement was reduced to 4 per cent in September 1998. To a certain extent, this is due to an overly cautious stance by banks and a depressed demand for credit. The base lending rate (BLR) for commercial banks declined from 11.96 per cent in March 1998 to 8.05 per cent in March 1999. Interest rates also declined precipitously with the interbank (three-month) rates falling from approximately 11 per cent in September 1998 to 6.4 per cent in February 1999. In the long run, this may have adverse implications for the asset quality of banks.