Malaysia and Indonesia: Road to recovery 20 years after Asian financial crisis

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‍It’s been 20 years since the Asian financial crisis, and some of the most severely hit countries in Southeast Asia – Thailand, Indonesia, South Korea and Malaysia – are now among world’s new emerging markets.

So how did a crisis in turn reshape the economies? Are they on the right track permanently?

Malaysia: Unorthodox measures makes economy more resilient

Back in 1997, many analysts said Malaysia’s currency, the ringgit, was overvalued by about 20 percent. But no one expected it to lose nearly half of its value while funds also fled the country’s stock market.

Unlike Thailand, Indonesia and South Korea, Malaysia rejected IMF assistance and even lowered interest rates to boost lending, re-capitalized banks, rehabilitated troubled companies, imposed controls to prevent capital flight, and pegged its currency to the US dollar.

It was an unorthodox approach that many predicted would backfire badly. But in fact, Malaysia recovered faster than other countries, although growth has never again reached the pre-crisis levels.

“In the short term, we were able to ease the pain. But Malaysia still has governance issues that we need to worry about. The institutional reforms that were seen in other countries were not seen here,” said Malaysian Economist Mohamed Ariff.

Malaysia's Central Bank Governor Muhammad Ibrahim shows a report showing the first-quarter GDP growth on May 19, 2017. The country’s economy is growing at its fastest pace in two years, boosted by stronger domestic demand and increased exports. /VCG Photo

Last year, Malaysia saw its currency slide to the lowest levels since the crisis and foreign capital again exited. But authorities have felt no need to take drastic action, which showed their strengthened confidence in the country's fundamentals and robustness 20 years on from the Asian financial crisis.

Indonesia: Strengthening banking regulations is key

Indonesia was one of the worst hit countries, as many industries are still slowly recovering from the 1997 crisis.

That’s partly because Indonesia’s banking sector had serious liquidity issues, which widely affected businesses across the country.

“People were withdrawing rupiah (Indonesian currency) and unfortunately the bank who gave us loans were closed down by the government,” business owner Andy Himawan recalled. His new company unfortunately ran into the crisis months after it was established.

Now with a better regulated banking sector, Himawan’s company has become one of the largest telecommunications network in Indonesia, providing service for the government and several manufacturing and transportation industries across the country.

Many others were not so lucky. The manufacturing and trade industries took it the hardest by suffering negative growth of up to 12 percent year-on-year.

Indonesian students organize a protest against the rise in electricity tariff and gasoline price in Jakarta, Indonesia, January 12, 2017. /VCG Photo

“Back when the economy could grow 10 percent, industrial sector grew up to 30 percent before the crisis, but now our industrial growth is still below five percent,” said Economist Bhima Yudhistira.

Bhima said there needs to be a shift in exports from commodity based to industrial product based.

The Indonesian government learned a lot from the massive financial crisis. They have since introduced several key policies that would help them to better recover from such a disaster.

Right now, strengthening regulations in the country’s banking industry is a top priority. Bank Indonesia’s new “Financial Crisis Prevention Act” aims to solve liquidity problems and to reduce systemic risks in the country’s banking sector."

(Rian Maelzer and Silkina Ahluwalia contributed to the story.)