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MECHANISM AND POLICIES FOR NATIONAL ECONOMIC RECOVERY
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by Dr. Victor Wee
Two weeks after the floatation of the Thai baht on July 2, 1997, the ringgit was allowed to find its own level. By January 1, 1998, the ringgit had
depreciated by 35% and the Kuala Lumpur Composite Index fell by half. The currency depreciation and falling stock market worsened in 1998. Meanwhile,
the rising number of corporate failures and non-performing loans affected the willingness of banks to lend. The country was in the grip of a severe credit
squeeze, and the full impact of shrinking demand and rising corporate distress were felt by the entire economy.
OBJECTIVES OF THE NEAC
Early into the crisis, the Government recognised that the regional crisis would deteriorate further rather than improve during coming months. Therefore, a
coordinated and concerted effort was needed to deal with the impending economic crisis to prevent the onset of a recession. Accordingly, the Cabinet
established the National Economic Action Council (NEAC) on January 7, 1998 to serve as a consultative body in dealing with the economic problems and
bring about economic recovery.
The NEAC objectives were as follows:
Restore public and investor confidence, particularly that of foreign investors, with regard to the economy, which is fundamentally strong;
Ensure that the country does not enter into a recession as a result of the decline in the value of the ringgit and the fall in the share market;
Revive the national economy and make it competitive globally by implementing decisions of the NEAC with regard to enhancing international
competitiveness; and
Strengthen the economic base of the country so as to achieve a developed nation status through rapid and sustainable economic growth.
To achieve the above-mentioned strategic objectives, the NEAC performs its functions according to the following Terms of Reference:
Identify current issues and challenges facing the economy based on observation and scrutiny by members of the NEAC or on the analysis
undertaken by the Working Group of the NEAC;
Guide the Secretariat or Working Group in
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studying all issues and challenges identified
In Low Chee Keong, Financial Markets in Malaysia, Chapter 18, Malayan Law Journal, 2000. Draft copy.
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proposing effective and efficient strategies to address short-term, medium-term and long-term issues and challenges that have been
identified
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preparing detailed action plans for the proposals submitted;
Discuss and scrutinise proposals that have been submitted and make decisions in accordance with the provisions of the law;
Monitor the implementation of the decisions made and make amendments if necessary; and
Submit to the Cabinet all important decisions made by the NEAC for its information and endorsement.
The implementation of the decisions of the NEAC are closely monitored and coordinated to ensure that the desired effects are achieved. The value of
NEAC in bringing about economic recovery is widely appreciated. Although it is generally regarded as having a finite life span, there is no indication how
long it will continue within the government institutional structure following economic recovery.
STRUCTURE OF THE NEAC
The structure and modus operandi of the NEAC are so designed to enable it function efficiently and ensure that the decisions taken are implemented
expeditiously and effectively. The full Council, which meets at regular intervals, comprises ministers, state governments, key government officials, as well
as representatives from the private sector and interest groups. The NEAC is assisted by an Executive Committee, which meets almost daily to deliberate
in policy and operational issues. The Executive Director is responsible for the implementation of the decisions. He is assisted by the NEAC Working
Group, which looks into various aspects critical for restoring economic growth and stability. The Economic Planning Unit (EPU) acts as the Secretariat to
the Council.
Figure 1: Organisational Structure of NEAC
National Economic Action Council
Executive Committee
Executive Director
Secretariat
Economic Planning Unit
Working Group
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MEMBERSHIP OF NEAC
THE COUNCIL
The are 26 members of NEAC, which include ministers with economic agencies,2 Executive Director of NEAC, Governor of the
Central Bank, Chief Secretary to the Government, as well as representatives from industry, banking and finance, trade unions,
consumer associations, and selected resource persons. Since Malaysia is a Federation of States, Chief Ministers of State
Governments are invited to attend the meeting to provide input for decision making and the leadership for policy implementation
at the state level. They are, however, not accorded full member status. The Prime Minister, Dato' Seri Dr. Mahathir bin
Mohamad, is the Chair for the Council, while the Deputy Prime Minister, Datuk Seri Abdullah Ahmad Badawi, is the Deputy
Chair. Decisions are arrived at by consensus.
EXECUTIVE COMMITTEE
The Executive Committee (Exco) to NEAC meets to discuss on wide-ranging issues to draw up policies and strategies that can help resolve the economic
problems and oversee the implementation of NEAC decisions. The commitment by this high-level committee to meet almost daily illustrates the
importance of economic recovery on Malaysia's list of priority. The Executive Committee has the Prime Minister as the Chairman and the Deputy Prime
Minister as the Deputy Chairman. The other members include Minister of Finance, Executive Director to NEAC, Governor of the Central Bank, and three
members appointed by the Prime Minister. The membership also includes the Director General of Economic Planning Unit, who acts as secretary to
NEAC, and the Special Officer to the Minister of Special Functions, who heads the NEAC Secretariat.
EXECUTIVE DIRECTOR
Tun Daim Zainuddin, the First Finance Minister and the Minister of Special Functions, was appointed the Executive Director for the implementation of the
decisions. During the last recession in the mid-1980s, Tun Daim had been the Finance Minister who engineered Malaysia's economic recovery. The terms
of reference of the Executive Director are as follows:
Responsible to the Chairman and/or Deputy Chairman;
Empowered to coordinate all activities of the relevant authorities in reviving the national economy;
Formulate and implement new strategies to ensure the attainment of the objectives of the NEAC;
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These agencies are Ministry of Transport, Ministry of Works, Ministry of Primary Industry, Ministry of International Trade and Industry, Ministry of
Education, Ministry of Agriculture, Ministry of Entrepreneur Development, Ministry of Domestic Trade and Consumer Affairs, and Ministry of Land and Cooperative Development.
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Chair the Working Group on aspects critical to reviving investor confidence and strengthening the national economy; and
Prepare and submit detailed reports to the Chairman/Deputy Chairman of NEAC.
WORKING GROUP
In assisting the Executive Director, the Working Group examines a wide range of issues, including foreign direct investment, banking and finance, capital
market, currency, current account deficit, development of key economic sectors, and social issues arising from the economic crisis. Relevant parties are
called in for discussions to address outstanding policy issues, clear operational bottlenecks or help resolve problems that work against economic recovery.
Together with the Secretariat, the Working Group prepares memorandums for the consideration of NEAC. The members of the Working Group are
appointed by name on recognition of their experience and expertise. As at June 30, 1999, the NEAC Working Group members are Tan Sri Thong Yaw
Hong (Chairman of Public Bank), Tan Sri Wan Azmi Wan Hamzah (Chairman of Land and General Berhad), Datuk Dr. Zainal Aznam Yusof (Deputy
Director General of the Institute of Strategic and International Studies), and Professor Madya Dr. Mahani Zainal Abidin from University of Malaya. The
Executive Director of NEAC chairs the meeting of the Working Group.
NEAC SECRETARIAT
The NEAC Secretariat is established under the Economic Planning Unit and provides the secretariat support at all levels of NEAC. There are seven
officers in the secretariat, all co-opted from the Economic Planning Unit. The Secretariat collaborates with the Working Group in undertaking analyses and
providing timely reports to NEAC on critical issues. In addition, the Secretariat keeps a tab on the progress of implementation of the Recovery Plan and
follow-up actions taken by the Government. The NEAC secretariat and Working Group maintain an open-door policy and provide the "hotline" for various
parties from the government, industry and public to give immediate feedback on government policy. As a result of the streamlined organisation structure
and lines of communication, decisions can be made by NEAC very quickly in addressing wide-ranging issues.
NEAC COMMUNICATIONS TEAM
The function of the team includes disseminating information to the local and foreign media on the implementation of the National Economic Recovery Plan
(NERP). It also helps in highlighting the progress of the plan implementation and maintains the NEAC homepage on the Internet. Members of the
communications team are recruited from the market on a contract basis and have experience in public relations and mass media.
NATIONAL ECONOMIC RECOVERY PLAN
The NEAC was prepared and launched a comprehensive National Economic Recovery Plan (NERP) on July 23 1998, after having assessed Malaysia’s
unique situation and attributes. This plan was drawn up after extensive consultations with Federal and State Government leaders, senior and retired
government officials, captains of industries, representatives from industry groups, trade unions, professional associations, media, women organisations,
non-governmental organisations, and multilateral agencies, such as the World Bank and IMF. The NERP presents the framework for action to counter the
negative effects of the ringgit depreciation and stock market collapse and recommends wide-ranging proposals for economic stabilisation and structural
reform. As its starting point, the Recovery Plan takes stock of the country’s financial and real economic sectors in order to seek out new ways to
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strengthen them further. It presents recommendations to address and rectify the weaknesses in the system that had dampened the growth prospects of
the economy.
The National Economic Recovery Plan contains six objectives, 40 lines of actions, and over 580 recommendations. The objectives of the Recovery Plan
are:
1.
Stabilising the Ringgit
2.
Restoring market confidence
3.
Maintaining financial stability
4.
Strengthening economic fundamentals
5.
Continuing the equity and socio-economic agenda
6.
Revitalising adversely affected sectors
OBJECTIVE 1: STABILISING THE RINGGIT
The volatile and depreciating ringgit had been the key factor causing the crisis. The Recovery Plan recommends four lines of actions. First is the adoption
of an exchange rate regime that provides flexibility but reduces volatility. Second, Malaysia should aim to increase its external reserves equivalent to at
least 5 months of retained imports (around RM84 billion) to build confidence in the ringgit. In order to reduce dependence on the US dollar, the Recovery
Plan proposes Malaysia’s exports should be quoted in the currency of the country concerned, while the mechanics for bilateral
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TABLE 1: PLAN FOR ACTION UNDER NERP
Objective 1: Stabilising the Ringgit
Appropriate choice of exchange rate regime
Reduce an over-dependence on the US dollar
Increase External Reserves
Adopt a Balanced Interest Rate Policy
Objective 2: Restoring Market Confidence
Improve Transparency and Regulatory Environment
Establish Rules for Assisting Industries and Companies
Increase Consistency of Policies
Adopt Liberal and Market-Based Policies
Improve Public Relations
Improve the Dissemination of Economic Information
Objective 3: Maintaining Financial Market Stability
Preserve the Integrity of the Banking System
Establish Agencies Along the Lines of FDIC/RTC
Recapitalise the Banking Sector
Monitor Closely Overall Credit Expansion
Improve the Capital Market
Develop the PDS Market
Objective 4: Strengthening Economic Fundamentals
Increase the Quality of Investments
Improve the Balance of Payments
Maintain a Balanced Public Sector Financial Position
Maintain an Appropriate Monetary Policy
Maintain Price Stability
Increase Labour Competitiveness
Source: National Economic Recovery Plan: Agenda For Action
Objective 5: Continuing the Equity and
Socio-Economic Agenda
Ameliorate the Hardship from Poverty
Address the Issues on Bumiputera Equity Ownership
Expand Employment Opportunities
Expand Tertiary Education
Address the Problem of Graduate Unemployment
Control the Influx of Foreign Workers
Gear Up State Corporations to Face the Crisis
Revamp Cooperatives and Cooperative Banks
Protect Environment for Sustainable Development
Objective 6: Revitalising Affected Sectors
Resource-Based Industries
Mining and Petroleum
Manufacturing
Information Technology
Motor Industry
Construction
Property
Infrastructure
Transportation
Freight Forwarding
Tourism
Industrial Development Finance Institutions
Insurance and Reinsurance
and multilateral payment arrangements for trade among ASEAN countries should be
worked out quickly. Finally, the interest rate should be lowered since high interest rates
are damaging for business.
OBJECTIVE 2: RESTORING MARKET CONFIDENCE
The weakening of confidence has prolonged the currency crisis. Accordingly, restoring
market confidence is an important step to stabilise and strengthen the currency. Under
this objective to shore up confidence, the Recovery Plan proposes improvements to the
regulatory environment, as well as increasing the transparency and consistency of
Government policies. In addition, there are recommendations on improving public
relations and economic information dissemination. There should be more frequent
release of economic data and stronger enforcement by regulatory authorities, such as
the Securities Commission and Kuala Lumpur Stocks Exchange.
There would be rules for assisting industries and companies in trouble. The assistance
granted by the Government to companies in distress will be guided by the criteria of
national interest, strategic interest, and equity considerations under Malaysia's New
Economic Policy and National Development Policy. There should be no bailout of
individual investors or lenders using public funds, except for industries and corporations
in key, strategic sectors of national interest. In a rescue involving public funds, private
investors and lenders must take their appropriate ‘haircut’. The NERP recommends
increasing policy consistency, adopting liberal market-based policies, and improving
public relations in order to enhance the image of the country both domestically and
overseas.
OBJECTIVE 3: MAINTAINING FINANCIAL MARKET STABILITY
The Recovery Plan places special attention on addressing the weaknesses in Malaysia’s
financial system that have arisen from rapid credit growth and high exposure to property
and stock markets. The actions under the Recovery Plan include closer surveillance of
banks, encouraging bank mergers, and addressing the worsening collateral and nonperforming loans (NPLs). In addition, it recommends the establishment of an asset
management corporation for the removal of NPLs from banks and a special purpose
vehicle for bank recapitalisation.
Meanwhile, overall credit expansion should be monitored closely and a bond market
should be developed for large infrastructure projects. The Recovery Plan makes specific
proposals to improve the capital market and developing the private debt securities
market. They include strengthening the regulatory framework, addressing the
weaknesses of market participants and activities, and speeding up the approval process
of the private debt securities market. As a matter of national interest, the authorities must
address the growing domination of the Central Limit Order Book, an unauthorised trading
of Malaysian shares in Singapore.
OBJECTIVE 4: STRENGTHENING ECONOMIC FUNDAMENTALS
Although Malaysia has generally good economic fundamentals, there are several areas
where these can be strengthened further. The actions include increasing the quality of
investments, improving the balance of payments, and increasing labour competitiveness.
In addition, a balanced public sector financial position, an appropriate monetary policy,
and price stability should be maintained.
Indicators such as total factor productivity (TFP) and incremental capital output ratio
(ICOR) suggest that the quality of investments in the country could be further improved.
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Wastage should be cut and cost reduced to increase the efficiency of investments.
Large-scale investments with high import content should be prioritised since they require
a large amount of capital and place the external balance under pressure. Malaysia
should continue in its efforts to improve the balance of payments by strengthening the
merchandise account, reducing the services account deficit, and reducing deficit in
transfers.
There would be severe contraction of private consumption and investment as a result of
the economic crisis. Despite the expected fall in government revenue, the Recovery Plan
argues that the government should not contribute to further economic contraction by
cutting down public expenditure. Instead, it recommends that the government should go
for a budget deficit in 1998 and 1999 to make up for the decline in private sector
activities. The Recovery Plan strongly recommends that Bank Negara should ease
monetary supply to ensure that credit is available for businesses to continue generating
economic activities. This is to avoid unnecessary business failures due to the lack of
access to funds.
The Government is strongly committed to non-inflationary policies and should adopt by
supply enhancement measures and reduce distribution and marketing costs to ease
supply constraints and bottlenecks. To enhance Malaysia’s international
competitiveness, wage increases should reflect productivity gains.
OBJECTIVE 5: CONTINUING THE EQUITY AND SOCIO-ECONOMIC AGENDA
The equity and socio-economic agenda address the need for a social safety net in order
to lessen the pain associated with the financial crisis. The economic contraction had
badly affected household income, employment opportunities, and Bumiputera share
ownership. As less Malaysians go overseas for studies, there is the need to expand
tertiary education to satisfy the surge in local demand. State corporations and
cooperatives have to be revamped in order to be more focussed in their activities. The
commitment to preserve the environment should continue despite the pressures of
reduced financial resources in the public and private sectors.
OBJECTIVE 6: REVITALISING AFFECTED SECTORS
The crisis has wide ranging implications on sector performance and prospects. Many
sectors have been adversely affected by rising costs, falling demand, increasing financial
problems, and mounting debts. The industries that have initiated expansion programmes
in previous years are now faced with excess capacity and underutilisation of equipment
and manpower. The Recovery Plan discusses the key issues and makes
recommendations for the twelve sectors adversely affected by the crisis. It also supports
the promotion of IT and Multimedia Super Corridor (MSC) as the way into the future.
THRUSTS OF THE RECOVERY PLAN
The main features of the macroeconomic policies in the National Economic Recovery
Plan can be summarised as follows:
Fiscal stimulus
Easing monetary policy
Selective capital control measures
Reforming the financial and corporate sectors
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FISCAL STIMULUS
The Government eased its fiscal policy and took immediate action to avoid a deeper
economic recession.
In July 1998, government expenditure was increased to RM7 billion to
promote exports and counteract a decline in domestic demand. These
measures combined with a decline in government revenue resulted in a
budget deficit of RM5 billion or 1.9% of GNP in 1998. Priority was given to
projects involving agriculture, low- and medium-cost housing, education,
infrastructure and public facilities, health, rural development and poverty
eradication.
The Government also announced the establishment of a RM5 billion fund for
infrastructure projects, such as mass-transit railway transportation, ports,
highways, water supply projects, and waste disposal and sewerage projects.
Since the economic crisis affected certain sectors and the poor
disproportionately, the Government increased the size of special funds to
support the export sector, small and medium enterprises, low- and mediumcost housing development, food producing and processing, New
Entrepreneurs Fund, and the rehabilitation of small and medium industries.
The 1999 Budget continues with the expansionary fiscal policy, while maintaining fiscal
prudence and discipline. Emphasis is placed on agriculture and rural development and
protection of lower income groups from the adverse effects of the financial crisis. The
larger expenditure combined with the expected decline in Government revenue is
expected to result in a budget deficit of RM16.1 billion or 6% of GNP in 1999.
EASING MONETARY POLICY
The availability of finance is essential for business to continue generating economic
activities and avoid unnecessary business failure due to the lack of access to funds.
Thus, measures were also taken to ensure that productive activities continue to receive
financial support:
Statutory reserves requirement (SRR) had been gradually reduced from
13.5% in February 1998 to 8% in July, 6% in September 1, and 4% in
September 16, 1998 to increase liquidity in the banking system. The
reduction of the SRR helps to reduce the banking transactional costs as well
as increase liquidity in the banking system. Part of the reduction of SRR, that
is, from 6% to 4%, was for the purpose of providing the funds for bank
recapitalisation.
Actions have been taken to reduce the interest rates on loans and ease
restrictions on debt repayments. The three-month intervention rate fell from
a high 11% in June 1998 to 6% currently. This will ease the pressure of loan
repayment as well as reduce the cost of business.
The period of the NPL has been reverted to 6 months in September 1998
from 3 months in March 1998 to give some breathing space to the affected
companies and business. Bank Negara Malaysia publishes both definitions
of NPL for comparability.
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SELECTIVE CAPITAL CONTROL MEASURES
Despite attempts to stabilise the economy for the good part of 1998, these efforts were
nullified by the volatility of the ringgit. As a small country, Malaysia can ill-afford the costs
associated with internationalising the ringgit. The interest rates for ringgit deposits
offered offshore were around 30-40% at the height of the crisis, while domestic interest
rates were around 11%, thereby prompting the outflow of the ringgit, which was later
used to short the ringgit. The movements of the ringgit were closely tied to the Kuala
Lumpur stock market, as well as the stock markets and currencies of the crisis-hit
countries in the region. From the level of 1084 on 2 July 1997, the Kuala Lumpur
Composite Index plunged to 571 on 2 January 1998 and slid further to its lowest level of
262 on 1 September 1998.
Accordingly, selective capital control measures had been adopted on September 1, 1998
to regain monetary independence and insulate the Malaysian economy from further
deterioration in the world economic and financial environments. The ringgit was pegged
at RM3.80 to US dollar or at US$0.26. The measures effectively made the ringgit nontradable outside the country, bring offshore ringgit back to the country, and reduce the
ability of non-residents to trade in ringgit. There is also a 12-month holding period for
foreign portfolio investment. In order to ensure the effective operation of the capital
control measures, the unlicensed bourse trading of Malaysian equities outside the
country was terminated. The Central Limit Order Book International (CLOB) in Singapore
was closed down on September 15, 1998.
These are strong pre-emptive measures to preserve the recent gains made to stabilise
the domestic economy and create an environment conducive for the revival of consumer
and investor confidence. The capital control measures are selective in nature and
essentially three pronged:
1. Bring the ringgit back and put an end to the offshore ringgit markets that
are responsible for ringgit volatility. This prong prevents the trading of
the Malaysian currency.
2. Peg the ringgit at RM3.80 to the US dollar.
3. Reduce stock market volatility by imposing a 1-year holding period for
ringgit assets owned by non-residents, who must park their funds in
external accounts. This deters the movement of short-term capital from
causing excessive volatility in domestic financial markets, especially
equities.
The ringgit was completely convertible in the current account, as well as all dealings
affecting foreign direct investment. There is no restriction to the repatriation of dividends,
interest, rental, commission, fees, royalties and profits from the sale of assets in
Malaysia. Disbursements or repatriation of external account balances are allowed for
expatriates and foreign workers in Malaysia, Malaysians working/studying overseas,
non-Malaysian students studying in Malaysia, and companies with Multimedia Super
Corridor status.
The new capital control policy is not meant to inhibit foreign direct investment or interfere
with the repayment of foreign debt. It is to prevent speculation of the ringgit and manage
short-term capital flow, which can be destabilising when suddenly withdrawn. In 1997,
Malaysia experienced US$9.5 billion net outflows of portfolio equity investment, which
amounted to 10 per cent of its GDP. The sudden outflow of funds created dislocations to
the whole economy and is inimical to the corporate sector.
The new exchange control measures do not affect the normal conduct of economic
activity and continue to guarantee the free flow of foreign direct investment. The changes
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are aimed at containing speculation on the ringgit and minimising the impact of shortterm capital inflows. Malaysia remains committed to the market mechanism and to
liberalisation. But a free market can only operate under conditions of a stable and
efficient global currency and financial systems.
RELAXATION OF CAPITAL CONTROLS
As economic conditions improve, the Government relaxed the capital control measures
by adopting the repatriation levy in the place of the 12-month holding period to make
Malaysia more attractive to portfolio investors. Under this new measure, there are two
sets of repatriation levy, depending on whether the funds came in before or after
February 15, 1999.
For funds that came in before February 15, 1999, a graduated taxation
scheme will be applied to the capital value depending on how long the funds
are retained within the country. The investment is valued at the date of the
investment or 1 September 1998, whichever is earlier. A 30% levy is
imposed on capital repatriation on/before 31 March 1999; a 20% levy for
repatriation on/before 30 May 1999; a 10% levy on or before 1 September
1999. There will be no levy on the principal for repatriation after 1 September
1999.
As of 15 February 1999, new investments into Malaysia will be subject to
profit tax on repatriation, but there will be no levy on the principal capital. A
levy of 30% will only be imposed on profits if repatriated within 12 months
from the date the profit is made, and 10% if the profit is repatriated after
more than 12 months. It should be noted that the levy is only imposed on
investments in shares, bonds and other financial instruments but does not
apply to investment in properties.
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Table 2: Repatriation Levy
Funds brought in before Feb. 15, 1999
Principal
Principal as at
Repatriated On
Sept. 1, 1998
March 31, 1999
Funds brought in on
or after Feb. 15, 1999
Levy
30%
Up to 7 months
Sept. 1, 1998
May 30, 1999
20%
No levy
Exceeding 7 months but not more
than 9 months
Sept. 1, 1998
Aug 31, 1999
10%
Exceeding 9 months but not more
than 12 months
Sept. 1, 1998
Sept. 1, 1999
0%
Exceeding 12 months
Profits
Repatriation during 12-month holding period-No levy
Repatriated during period
up to 12 months profits
are made--30% levy
Repatriation thereafter--10% levy
Repatriated thereafter-10%
The repatriation levy was adopted after getting feedback from foreign fund managers
and after considering the improvements in the domestic economy. The replacement of
capital controls with the repatriation levy is important to getting Malaysia re-accepted by
the international capital market investors, not just to get re-listed into the international
stock indices. With the eventual re-acceptance, Malaysia will be able to tap international
capital at reasonable costs.
Since the imposition of capital controls on September 1, 1999, the KLCI rebounded from
a level of 262 to 847 as on July 8 1999. The market capitalisation during the period rose
by RM368 billion, or 1.3 times the size of GDP. The amount of net inflow of foreign
portfolio funds was estimated at RM3.9 billion between mid-February and June this year.
MECHANISM FOR BANKING AND CORPORATE RESTRUCTURING
The Recovery Plan gives top priority to programmes addressing the financial sector
problems brought about by the crisis. The government has established a new
institutional framework for addressing the liquidity needs of weaker financial institutions
and for restructuring and consolidating the banking system. The Government established
Danaharta, a new asset management company, by an Act of Parliament to remove the
NPLs from the balance sheets of financial institutions at fair market value and to
maximise their recovery value. This will free the banks from the burden of debts that had
prevented them from providing loans to their customers. Banks would be provided with
liquidity and they can realise capital losses on problem loans once and for all. The price
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to be paid is set at a fair value following due diligence reviews to establish the quality of
assets and their estimated recoverability.
For the achievement of Danaharta's objectives, banking institutions with NPLs above
10% of total loans are required to sell off the NPLs to bring down the NPL ratio.
Danaharta would only acquire NPLs above RM5 million, and will also manage and
dispose of non-performing assets through the financial, operational, and management
restructuring of debtor organisations. Banking institutions that do not dispose their NPLs
to Danaharta are required to write-down the value of the loans, restructure these loans or
refer them to the Corporate Debt Restructuring Committee.
Figure 2: Mechanism for Financial and Corporate Sector Restructuring
Corporation
Danamodal
New Loans
Bank
New Capital
Sell NPLs at Fair
Market Value
Danaharta
Rehabilitate
Borrowers
Issue
Bonds
Restructure
Existing Facilities
Corporate Debt
Restructuring
Committee
(CDRC)
With the removal of NPLs from the banks' balance sheets, there is the need to ensure
that banks are sufficiently capitalised. The Government recognises the constraints that
banks would face in raising capital on their own under the crisis environment. For this
purpose, Danamodal, a special purpose vehicle, was set up to capitalise and consolidate
the banking sector by injecting capital into viable but under-capitalised banks to ensure
that they meet the standards for capital adequacy. The injection of capital will enhance
the resilience of banks and increase their capacity to grant new loans, thereby speeding
up the economic recovery process.
Danamodal would coordinate its activities with Danaharta, as well as the banking
institutions in strengthening the institutions' capital, liquidity and profitability positions. As
a pre-requisite to receiving capital injection, banking institutions seeking recapitalisation
from Danamodal are required to make a firm commitment to sell their NPLs in excess of
10% of total loans. Danamodal will also press ahead to bring about reforms in the
management of the banks receiving its capital injection. Danamodal has a finite life span
and would sell its stakes in the banking institutions once the economic recovery
programme is fulfilled.
Malaysia has a comprehensive legal framework for corporate transactions that also
cover bankruptcy and reorganisation process. Although market-based restructuring
options are available under the Companies Act, the government has added new
measures to facilitate and finance corporate restructuring. To complement the
restructuring of the financial system by Danaharta and Danamodal, the Corporate Debt
Restructuring Committee (CDRC) was set up in August 1998 to facilitate debt
restructuring of viable companies outside the courts. The aim is to minimise losses to
creditors, shareholders and other stockholders, avoid placing viable companies into
liquidation or receivership, and to enable banking institutions to play a greater role in
rehabilitating the corporate sector. The CDRC adopts a constructive approach and
framework to enable creditors and debtors to come together and devise a workout plan
amicably without resorting to legal procedures. The CDRC complements the role of
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Danaharta and Danamodal to accelerate the pace of economic recovery by providing an
approach for banking institutions to play a greater role in the financial rehabilitation of the
corporate sector.
Figure 3: Progress Cycle of Corporate Debt Restructuring
Creditors'
Meeting
Application
Received
Viability Study
Carried Out
Creditors
Exit
Creditors'
Meeting
Restructuring Proposal
Proposal Rejected
Revised Restructuring Proposal
Sold to Danaharta
Creditors
Agreed
Implementation
Creditors
Agreed
By June 1999, Danaharta had removed RM38 billion of NPLs from the banking system.
Danamodal had injected RM6.16 billion into 10 banking institutions. As a result, the risk
weighted capital adequacy ratio rose from 10.2% to 15.1%, way above the minimum
Basle standard of 8%. In the case of corporate debt restructuring, CDRC received 60
cases amounting RM32.6 billion worth of debts. Six cases were withdrawn or rejected
because the applications did not meet the established criteria of CDRC. Eleven cases
were completed involving RM10.9 billion, whereby the creditors have accepted the debt
restructuring proposals. The remaining 43 cases are at different stages of progress,
which include viability studies, awaiting restructuring proposals, awaiting revised
restructuring proposals, or awaiting lender's decision.
RECOVERY MANAGEMENT MEASURES
Currently, the NEAC is monitoring the feedback of the recommendations from agencies,
which are required to report the progress of implementation under their purview. The
NEAC Secretariat reports regularly to the Cabinet and provides regular updates to the
press and the Internet on the implementation of NERP. To date, most of the
recommendations of the National Economic Recovery Plan have already been taken up
by the agencies. They include measures to stabilise the ringgit, restore market
confidence, restore financial market stability, and strengthen economic fundamentals.
There have also been substantial progress made in implementing measures that
address equity and socio-economic issues as well as the adversely affected sectors.
Some of the recommendations, however, require additional preparatory work, especially
those requiring legislative input or further study. Furthermore, some agencies face
operational problems or have counter proposals to make. Whatever the implementation
status or problems encountered, the Cabinet is duly kept informed.
Agencies are required to submit regular reports on progress, which are presented to the
Cabinet for their information. There is also a monthly press release to inform the public
on the progress achieved. After addressing the macroeconomic issues, the NEAC is now
examining specific issues that can pose a problem to economic recovery. Among some
of the measures that receive special attention are:
Accelerate implementation of public sector projects. There had been
underachievement in the implementation of public-funded programmes in
1998 amounting to around one-fifth of the development allocation. This had
muted the effect of the fiscal stimulus of the government. Accordingly,
15
Ministers and the heads of government agencies are now required to track
the progress of programme implementation in their agencies and provide a
report to the NEAC on a fortnightly basis.
Push for increased bank lending. Banks are encouraged to lend to viable
and productive projects, which offer prospect of good returns. The target for
credit expansion for 1999 is 8% growth.
Attract foreign direct investments (FDI). Malaysia continues to encourage
foreign direct investments to take advantage of its low costs, educated and
skilled labour, high quality infrastructure, and conducive business
environment.
Strengthen corporate governance. Steps have been taken to enhance
transparency by improving disclosure by corporations as well as improving
the ownership structures with potential abusive conduct by large
shareholders at the expense of minority shareholders. Several measures,
including amending legislation and rules, have been taken and a special
report have been prepared under the Ministry of Finance to raise the
standards of corporate governance in Malaysia.
Diversify into low import content, high linkage resource-based
industries. There is active promotion of industrial diversification into
resource-based and other export-oriented industries with high local content
and other spin-offs where Malaysia can derive maximum returns.
FINANCING THE NERP
An estimate of RM62 billion (US$16.3 billion) would be required to finance the recovery
throughout 1998-2000. This will cover the requirements of Danaharta, Danamodal, the
Infrastructure Development Fund, and additional allocations for the Seventh Malaysia
Plan (see Table 3). The funds would be obtained from the cheapest and non-inflationary
sources. Two-thirds of the requirements would be funded domestically, while the
remaining would come from foreign loans. Some of the foreign sources include Japan
EXIM Bank, Sumitomo Bank of Japan, Overseas Economic Cooperation Fund, and
multilateral sources such as the World Bank and the Asian Development Bank.
Table 3: Funding Requirements for Economic Recovery,
1998-2000
Programme
Danaharta
Danamodal
Infrastructure Development Fund
Additional Seventh Malaysia Plan Allocation
Total
RM billion
15
16
5
26
62
Source: White Paper: Status of the Malaysian Economy, 6 April 1999
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Table 4: Sources of Funds, 1999-2000
Source
Foreign Sources
Bilateral
Multilateral
Sovereign bonds/loans
Total Foreign Sources
Local Sources
Outstanding Cash Balance
RM billion
10.0
3.0
8.0
21.0
Provident, Pension & Insurance Funds
42.0
Provident, Pension & Insurance Funds
Oil Revenue
30.0
9.0
Annual Inflows
Total Local Sources
Grand Total
81.0
102.0
Source: White Paper: Status of the Malaysian Economy, 6 April 1999
TABLE 5: FUNDING FOR DANAHARTA
RM billion
15
Requirement
Sources of Funds
Government contribution
Govt-guaranteed loans
Zero-coupon bonds issued to financial institutions
1.5
3.5
10
TABLE 6: FUNDING FOR DANAMODAL
Danamodal's requirement on a worst-case scenario
Sources of funds
Paid-up capital from Bank Negara Malaysia
Zero-coupon bonds sold to banks
Other sources if required
RM billion
16
3.0
7.7
5.3
CONCLUSION
Malaysia is the only Asian crisis-hit country with its own recovery plan tailored for its own
needs. Since the adoption of selective capital control measures, the ringgit had stabilised
and confidence was restored in the market. By June 1999, the major part of financial
sector recapitalisation and reforms by Danaharta and Danamodal has largely been
completed, six months ahead of schedule. In May 1999, the level of non-performing
loans for the banking system moderated at 7.9% of total loans (or 13.0% based on the 3month classification). The next stage for Danaharta is the management and disposal of
assets to maximise recovery value, while Danamodal will press ahead to reform the
management of the banks under its assistance sector so that they emerge leaner and
stronger.
After five quarters of contraction, Malaysia's macroeconomic situation improved
markedly, with most indicators pointing to a positive second quarter in 1999. Exports
have been rising consistently since October 1998, boosting Malaysia's external reserves,
17
now up to nearly seven months of retained imports. Wealth has increased with
favourable effects on consumers. Private consumption like cars, houses and consumer
durable picked up, while the transactions demand for money had turned positive for the
first time in April 1999. Inflation rate has fallen to 2.9% in May 1999 and is expected to
remain low throughout the year. There is renewed ability of Malaysia to access foreign
capital markets. The Government's bond issue of US$1 billion in June was three times
oversubscribed, reflecting the confidence of foreign investors in Malaysia's economy.
Foreign direct investment continued to flow into the country although the flows have
slackened because of existing excess capacity.
Malaysia's economic recovery plan has helped to turn around the economy. The
monetary and fiscal policies adopted under the NERP reversed the economic contraction
and promoted growth. The very destructive and highly distortive effects of ringgit
speculation and destabilising flows of portfolio capital are addressed by the selective
capital control measures. Malaysia's economic prospect for 1999 looks good. Total
investment will show positive growth, with increased public investment and the corporate
sector responding to rising demand and replenishing stocks. Nevertheless, being a very
open economy, Malaysia will be subject to the uncertainties in the external environment,
while the domestic corporate sector will require time to heal the wounds sustained during
the severe economic crisis.
July 14, 1998
Papers/NEAC-Chapter.DocVic
The Regulation of Financial Markets in Malaysia by Low Chee Keong, Chinese Univ of
HK