How Malaysian Financial System Has Been Modeled to Withstand the Effects of a Financial Crisis - Research Proposal Example

How the Malaysian financial system has been modeled to withstand the effects of a financial crisis similar to the Global Financial Crisis of 2007/8: Research Proposal Introduction This is a proposal for a research on how the Malaysian financial system has been modeled to withstand the effects of a financial crisis similar to the Global Financial Crisis (GFC) of 2007-2008. The proposed research will evaluate different mechanisms that have been put in place to enable the Malaysian financial system withstand both external and internal shocks arising from financial crises similar to what happened in 2007/8. This will be based on how the system has been reconfigured following the effects of the GFC. This proposal is divided into several sections, each one of them carrying different information as follows. First, background information to the proposed study is briefly given. In this section, information about the relevance of the GFC and the Malaysian financial system as the subject for the proposed research is given. The objectives of the proposed research indicate the reasons that make it important for the research to be carried out. This is evaluated in terms of the significance of the findings of the proposed study. This is followed by the second section in which the objectives of carrying out the proposed research are presented. The third section of the proposal contains a brief examination of literature that is relevant to the subject of the proposed research. In reviewing the literature, emphasis is laid on studies that are relevant to the objectives of the study. Further, the brief review of literature not only evaluates findings in recent studies about the subject of the proposed research but also identifies gaps in the literature that the proposed study intends to fill. Finally, the methods that will be used in the proposed research are presented in this proposal. The information presented covers how the data shall be collected, processed, analyzed, interpreted and finally presented in the form of the findings of the research. Background Information Madubeko (2010, p. 33) observes that a financial crisis can be defined in terms of different aspects such as a collapse of the banking sector, currency crisis or a complete collapse of the financial system of a country or region, thus affecting the normal functioning of the economy. For the proposed study, the GFC can be seen within the context of the extent to which market failure in a single economy can trigger effects that spread across the world to affect different economies that are interconnected. Following the collapse of the housing market in the United States, different economies in the world were heavily affected. The effects were felt in the form of shocks on three major areas: the flow of capital, general global trade and the prices of different commodities (Ciro 2013, p. 57). Although the effects of the crisis affected different economies by virtue of their interconnectedness with each other, they were not experienced in equal measure by the economies across the world. The variations in the impact of the crisis on different economies was as a result of three things: the extent to which their financial systems were linked to those of the economies in the rest of the world, the degree of efficiency exhibited by the financial institutions and lastly, the soundness of the policies developed and adopted prior to and during the crisis (Peters, Shane & Torgerson 2010, p. 2). These three factors determined the extent to which the effects of the GFC in the form of a slump in global trade, reductions in capital flows and fall in commodity prices affected the financial systems of different countries in the world. The effect of the GFC on the economies of Asian countries in general and that of Malaysia in particular has been a subject of debate for quite some time. Although there has been consensus on the pace and overall effect of the crisis on the economies of the Asian countries, there still remain contentions about the subject of the effect of the crisis on the Malaysian economy in particular. This has occurred in different areas. One area of controversy has been the extent to which the Malaysian economy and financial system were affected by the crisis. The second issue, which arises from the second one, is whether it can be said that the Malaysian economy was able to withstand the effects of the financial crisis. If this is so, the question of what specific measures which were taken or were already in place to help mitigate the shocks from the crisis then arises. Prior to the GFC, the economy of Malaysia had gone through a number of different crises. These crises were regional in nature in that their origin, spread and overall effects were confined to economies within the Asian region. It is the formulation of new policies that has defined the manner in which the economy has managed to respond to them. First was the commodity shock of the 1980s which, triggered by a high rate of interest in the United States, caused a massive slump in the prices of commodities worldwide (Zin 2008, p. 145). The effects of the macroeconomic imbalance resulting from the crisis were seen in not only a reduction in the volume of trade in commodities for the Malaysian economy but also a deterioration in the terms of trade between Malaysia and its trading partners (Zin 2008, p. 147). In responding to this crisis, Malaysia adopted a comprehensive policy that sought to do a number of things. The most notable among them was promotion of foreign direct investments thus shifting from the initial British inspired policy that favored heavy industrial development while favoring expansion of the local equity market. On the other hand, the Asian crisis of 1997 was triggered by collapse in the property markets of different countries in Asia, most notable of them being Thailand (Sundaram 2009, p. 38). Although the economy of Malaysia seemed not vulnerable to the financial crisis that had started in Thailand, it was affected by it over the course of time. It is observed that the macroeconomic indicators represented by a low foreign debt, virtual full employment and high growth that the economy had at the time concealed the danger that had been created by the policies that favored increased short-term capital flows into the economy (Sharma 2003, p. 69). As such, the massive expansion of the local equity market through participation of foreign institutional and individual investors culminated into a stock market boom at the KLSE in the mid 1990s. However, with weak governance policies in place, the unfolding Asian Financial Crisis saw a massive reversal of portfolio capital outflows in Malaysia, causing a massive recession. The official response of the country was in the form of adopting new policies under the National Economic Action Council that sought to restructure banks and other financial institutions in the country. Also, following in the aftermath of the Asian crisis was a thorough reformation of corporate governance practices in the country’s corporate sector (Alnasser 2012, p. 270). Therefore, it is within this historical context that the subject of the measures that have been taken to cushion the Malaysian financial system against the effects of a financial crisis similar to the GFC can be understood. Also, given the fact that the Malaysian economy has been closely linked to those of the other developed countries in the world through its degree of openness, it remained completely exposed to shocks in the global financial systems. Although the economy of the country in general and the financial system in particular had successfully gone through and recovered from a number of crises before, the two were severely affected by the global financial crisis. Also, the severity and global nature of the crisis meant that the policies and responses that had been used to address the previous crises could not be successfully used to solve the global financial crisis of 2007/8. Objectives of the Study The topic for the proposed research will be how the Malaysian financial system is modeled to withstand the effects of a financial crisis similar to the GFC of 2007/8. The overall aim of the study will be to identify different measures in the Malaysian financial system which were put in place as a result of the effects of the GFC, and how they work in helping the system to withstand the effects of a crisis similar to the previous one. The following are the specific objectives of the proposed study: 1. To evaluate how the Malaysian financial system was affected by the GFC of 2007/8. 2. To identify specific measures which have been put in place to prevent the effects of a crisis similar to the 2007/8 GFC. 3. To identify different ways in which these measures that have been put in place function to prevent possible effects of such a financial crisis on the Malaysian financial system. 4. To develop recommendations on what other measures need to be put in place in order to cushion the Malaysian financial system from the effects of a financial crisis similar to the previous one. Literature Review The subject of the 2007/2008 GFC and the Malaysian economy in general has received considerable attention since the occurrence of the crisis. In many of the studies that have been carried out, three thematic areas occur: how the economy was affected by the crisis, the response of the country to the effects of the crisis and an overall assessment of whether the country actually succeeded in mitigating the effects of the crisis or not. According to studies carried out at the time of the GFC, the Malaysian economy was affected in the form of a slump in activity in its vital sectors. For instance, although the country had exhibited a sound balance of trade account prior to the crisis, this deteriorated at the onset of the crisis and continued to fall into negatives as the crisis progressed (Shankaran 2009, p. 7). In a similar study, Ibrahim (2011, p. 267) examined the impact of the crisis on the Malaysian economy in terms of how important sectors such as the money markets, debt securities markets, government debt market and the cross-currency interest swap market were affected. This happened in several ways. For instance, it is observed that the tightening of liquidity in the United States triggered a number of negative responses in the local banking sector which were reflected by sudden changes in key indicators such as the return on investment, core capital ratio and even the number of banks that remained operational well after the period of the crisis (Ibrahim 2011, p. 268). Similarly, Tayebi and Yazdani (2014, p. 7), in a study to establish the relationship between changes in oil prices and the financial crisis in Asian countries, observe that long-term changes in oil prices have a direct impact on the exports of the countries. This impact is exacerbated by the presence of shocks resulting from a financial crisis as it happened back in 2007/8. In general, it is observed that one of the most important effects of the global financial crisis on the world in general and the Malaysian economy in particular was seen in the financial openness that had been established over the course of time prior to the crisis (Cline 2013, p. 256). Although there has been consensus on the widespread nature of the effects of the crisis on the Malaysian economy, questions have remained on when exactly the effects of the crisis on the economy were fully felt. One study observes that this was felt during the first quarter of the year 2009 (Mindstorm 2009, n.pag). It is observed that following the unfolding recession in many highly developed economies of the world, the local economy responded in the form of a rapid decline in the production and investment activities (Mindstorm 2009, n.pag). This then led to scenarios such as decline in exports and the manufacturing sector, increases in the rate of unemployment and other general weaknesses in the local economy. In another study, it was observed that the Malaysian economy was highly affected by the GFC because of its level of integration with other leading world economies (Lim & Goh 2012, p. 4). Since the economy is a highly open one, it is directly integrated to the financial markets in terms of trade and investment. This level of openness made the economy vulnerable to the shocks resulting from the crisis. Further, Mei (2011, p. 3) evaluated the impact of the crisis on the Malaysian economy as one that happened in the form of different channels of impact as follows: one, a rapid slowdown on the rate of growth of the GDP; two, reduction in trade, investment and employment and lastly, the overall impact on the rate of employment in the economy. This can be seen within the context of the historical development of the Malaysian economy which has occurred in different phases as shaped by different polices that have been adopted at different periods in history (Charette n.d, p. 6). Many studies have been carried out to access the response of Malaysia to the global financial crisis. From the studies, it can be seen that the response adopted to counter the effects of the crisis on the Malaysian economy focused on different aspects of the economy. For instance, the IMF (2013) observes that the policy approach by Malaysia focused on addressing central elements of the macroeconomic environment of the economy. Such measures included reducing the interest rates, expanding the flow of credit and adopting an expansionary approach to fiscal management. The main purpose of easing the rate of interest was to maintain the rate of flow of money within the economy and, therefore, counter the negative effects of the crisis. According to the IMF (2013, n.pag), the government of Malaysia, through the Central Bank of Malaysia, played a key role in forestalling the effect of the crisis on the economy. This role was in the form of several actions such as drastic reductions in the Overnight Policy Rate from about 3.5% prior to the crisis to 2.0% at the onset of the crisis and lifting of the Government Deposit Guarantee. Such measures were similar to large fiscal programs which were implemented not only by Malaysia but other Asian countries as a way of increasing the aggregate demand of the economy for the recovery process (Chin 2012, p. 6). Further, according to Akyuz (2010, p. 26), many countries in Asia, including Malaysia, adopted policy measures that were different from what had been adopted to counter the effects of the Asian crisis. The policies were varied not only from one country to another but also in the specifics of implementation and overall impact on the economies. For instance, Malaysia did not seek to control capital outflows from the economy but rather put in place measures that sought to boost the confidence of the public in the financial system of the country (Akyuz 2010, p. 27). This was calculated as a way of helping the country’s financial system in particular and the economy in general to overcome the shocks arising from the crisis. Also, it was in contrast to the policies adopted by the country earlier during the Asian crisis. At that time, the government of Malaysia resorted to using strict capital controls as opposed to adopting measures developed by the IMF to mitigate the effects of the crisis (Amin & Annamalah 2013, p. 556). It can therefore be seen that many studies have evaluated the response of the Malaysian government to the global financial crisis in terms of different policies that were adopted to address specific areas of the economy. Also, it has been seen that the response of the government to the crisis entailed temporary measures to control the rate of interest and flow of money as well as long-term changes such as restructuring of the banking sector and other financial institutions (Nambiar 2012, p. 218). Although this has been the case, the areas of how the economy and financial system are modeled to overcome the effects of a crisis similar to the one of 2007/8 remain largely unexplored. This gap is what the proposed research seeks to fill. Research Methodology The proposed research will be carried out as an exploratory study on how the financial system of Malaysia has been modeled to withstand the effects of a financial crisis like the global financial crisis of 2007/8. Both qualitative and qualitative data shall be used in the proposed study. Quantitative data shall be collected in the form of different published statistics, and indices of the Malaysian economy prior to and during the global financial crisis. The quantitative data will also cover different indices and figures that represent important economic indicators for Malaysia during the period that is relevant to the study. On the other hand, qualitative data shall be used in the form of the opinions of different scholars on how Malaysia responded to the global financial crisis. The data that will be used in this study will be purely secondary data. As such, academic sources such as academic journals, books and other publications will serve as important sources of information for the research. Data about the period in question will be collected from official sources such as the website of the Central Bank of Malaysia and others. The collected data shall then be processed using qualitative and quantitative means. For qualitative data, a critical analysis of the findings of other studies on the subject carried out in the recent past will be done. On the other hand, qualitative data will be processed using quantitative techniques to establish the efficiency of different policies that were adopted by the government to mitigate the crisis as well as establish the impact of the crisis on the economy. This approach to processing the data of the experiment will be necessary for identifying and evaluating the measures that have been put in place to shield the Malaysian economy from the effects of a crisis similar to the GFC of 2007/8. Conclusion This proposal is based on a research study on the different ways in which the Malaysian financial system has been modeled to withstand the effects of a financial crisis like the GFC of 2007/8. There are several things that can be concluded from it. To begin with, it can be seen that the essence of the proposed study will be seen in the results of its objectives. First, the study will seek to evaluate how the Malaysian financial system was affected by the global financial crisis. Second, the study will not only identify specific measures that have been put in place to cushion the financial system against the effects of a possible financial crisis but also examine how they work. Third, the study will seek to develop recommendations on how the financial system can be improved in general. From the proposal, it can also be seen that the financial system of Australia can be understood in terms of how it has been affected by different forms of financial crisis that have occurred in the region over the past. Two key crises are the commodity prices slump back in the 1960s and the Asian Financial Crisis of 1997. The effects of the global financial crisis on the financial system of Malaysia are seen within the context of these crises. From the review of literature, it can be seen that many studies have focused on evaluating the impact that the global financial crisis had on the Malaysian economy. Such studies have focused on describing how different sectors of the economy were affected by the crisis. Also, it has been seen that a number of studies have been focused on evaluating how the government and the Central Bank of Malaysia responded to the crisis. Such studies seek to evaluate the effectiveness of the different policies that were adopted by the government to counter the effects of the crisis on the Malaysian economy. References Akyuz, Y 2010, ‘The global economic crisis and Asian developing countries: impact, policy response and medium-term prospects’, TWN Global Economy Series, No. 27, viewed 22 June 2014, Alnasser, S 2012, ‘What has changed? The development of corporate governance in Malaysia’, The Journal of Risk Finance, vol. 13, no. 3, pp. 269-276. Amin, F & Annamalah, S 2013, ‘An evaluation of Malaysian capital controls’, Journal of Economic Studies, vol. 40, no. 4, pp. 549-571. Charette, D E n.d., ‘Malaysia in the global economy: crisis, recovery and the road ahead’, viewed 22 June 2014, Chin, G 2012, ‘Responding to the global financial crisis: the evolution of Asian regionalism and economic globalization’, ADBI Working Paper Series No. 343, viewed 22 June 2014 Ciro, T 2013, The global financial crisis: triggers, responses and aftermath, Ashgate Publishing, London. 269-276. Cline, W R 2013, Financial globalization, economic growth and the crisis of 2007-2009, Peterson Institute, New York. Ibrahim, M 2011, ‘Impact of the global crisis on Malaysia’s financial system’, BIS Working Papers No. 54, viewed 21 June 2014, IMF 2013, Malaysia: publication of financial sector assessment program documentation – detailed assessment of observance of core principles for effective deposit insurance systems, International Monetary Fund, Washington. Lim, M H & Goh, S K 2012, ‘How Malaysia weathered the financial crisis: policies and possible lessons’, viewed 21 June 2014 Madubeko, V 2010, ‘The global financial crisis and its impact on the South African economy’, Master thesis, University of Fort Hare, viewed 22 June 2014, Mei, O S 2011, ‘Global financial crisis: implications on Malaysian economy’, viewed 21 June 2014 Mindstorm 2009, ‘The Impact of Global Economic Slowdown on Malaysia’, viewed 22 June 2014, Nambiar, S 2012, ‘Malaysia and the global crisis: impact, response and rebalancing strategies’, In, M Kawai, M B Lamberte & Y C Park, The global financial crisis and Asia: implications and challenges, OUP, Oxford, pp. 218- 246. Peters, M, Shane, M & Torgerson, D 2010, What the 2008/2009 world economic crisis means for global agricultural trade, DIANE Publishing, New York. Shankaran, N 2009, ‘Malaysia and the global crisis: impact, response and rebalancing strategies’, ADBI Working Paper Series No. 148, viewed 21 June 2014, Sharma, S D 2003, The Asian financial crisis: crisis, reform and recovery, Manchester University Press, New York. Sundaram, J K 2009, ‘Causes of the 1997-1998 east Asian crises and obstacles to implementing lessons’, in R Carney (ed), Lessons from the Asian financial crisis, Routledge, New York, pp. 33-64. Tayebi, S K & Yazdani, M 2014, ‘Financial crisis, oil shock and trade in Asia’, Journal of Economic Studies, vol. 41, no. 4, pp. 1-13. Zin, R H M 2008, ‘Poverty eradication, development and policy space in Malaysia’, in J M Nelson, J Meerman & A R Emborg (eds), Globalization and national autonomy, ISEAS, Pasir, Panjang, pp. 116-158. Read More