The global financial crisis in 2008-2009 made a severe change to the world economy with include United States. The problem begins in the US Financial system, arising from the deteriorating quality of subprime assets that started in 2007, that caused into a major horrible global financial crisis in the last half of 2008. From a housing crisis, it quickly grew into a banking crisis with the investment and merchant banks first absorbing the impact before it spread to the commercial banks. The main reason of this crisis was Lax Regulation and Low Lending Rates. Moreover the greed of top management people of the financial institutions was another reason of this crisis.
Especially, several failing of many large U.S and global financial institutions in September 2008 generated widespread fear of a systemic disruption across global financial markets which in turn had led to the “freezing” of the interbank and credit markets in many financial centres around the world. Despite the unprecedented large and aggressive financial measures taken by the authorities, the crisis intensified as prices of a large number of classes of financial assets collapsed resulting in a huge negative income and wealth effect. With the United States’ economy contracting sharply, it sent ripples across export-dependent Asian economies, which began to face a contraction as a consequence. Although the Malaysian economy was insulated from the direct effects of financial exposure because the new derivatives were not allowed into the country, the global financial crisis has cast doubt on the Government’s plans to achieve vision 2020 due to a collapse in exports and a slowdown in foreign direct investment (FDI).

The global financial crisis and the deleveraging activities in the advanced economies led to disposal of assets worldwide, including in the region, which caused sharp declines in the regional equity and bond markets. There was a large reversal in short-term capital flows, especially in the second half of 2008 as these funds were remitted back to the US. This sharp reversal of funds flows was, however, well absorbed by the domestic financial markets, given the ample liquidity in the financial system and the sound banking system. The strong reserves position of the country also acted as a buffer for US dollar liquidity and exchange rate movements during this turbulent period. In addition, the broad-based financial sector reforms and capacity building measures that have been undertaken following the Asian financial crisis had increased the financial sector’s resilience to withstand the financial turmoil. The exposure of the domestic banking system to the sub-prime assets was also limited. The bitter experience of the Asian financial crisis had already provided the incentive for Bank Negara Malaysia (BNM) to regulate the financial sector without unduly affecting the stock market. Exposure to foreign loans had been kept to a minimum and non-performing loans (NPLs) as a share of financial assets in the country had been one of the lowest registered among Asian economies for 2008 (World Bank, 2008), which led the Government to confidently say in early 2009 that Malaysia’s economic fundamentals were strong. While exposure to external financial markets has been successfully managed, there are concerns, however, over the fiscal stimulus designed to compensate for the contraction in exports.
Given Malaysia’s high export to Gross Domestic Product (GDP) ratio, the contraction in external demand is the most serious factor burdening the economy. One direct source of problems comes from a contraction in export demand, particularly in manufacturing, as the target markets are primarily developed economies that are currently gripped by a recession. A second direct source is a contraction in FDI inflows, particularly from these developed countries. The indirect sources of contraction come from all sectors dependent on GDP growth – consumer and investment demand – that affect agriculture, construction and services. Falling demand has already driven firms to retrench workers. Although reported retrenchments from government sources are small, it is believed that both underemployment (and with it the consequent fall in incomes) and unemployment figures are much higher than those officially reported. As Malaysia is a highly open economy, the impact of the global recession was felt strongly in the external trade-related sectors. The recession in the advanced economies started to impact the Malaysian economy in the fourth quarter of 2008. Exports and manufacturing production declined by 7.4% and 11.1% respectively, and private investment activity was dampened by the deteriorating business conditions. However, the resilience of domestic demand, particularly private consumption, provided support to the economy, preventing it from contracting in the fourth quarter of 2008 (real GDP growth: 0.1%). Malaysia experienced the full impact of the global crisis in the first quarter of 2009, as the deepening recession in the advanced economies intensified the impact of a rapid decline in global demand on trade, production and investment activities in the domestic economy. As the advanced and some emerging economies slide into a recession in the first quarter of 2009, world trade declined sharply by 28.6%, and in turn, affected exports from the region, including from Malaysia.

GDP and Components
The contamination from a crash in global aggregate demand on the Malaysian economy can be seen from a numeral of sectors and markets. The overall GDP growth rate of Malaysia reduced to 0.1% in the last quarter of 2008 and constricted by -6.2% in the first quarter of 2009 before falling further by -3.9% in the second quarter of the year. Malaysia’s economy has clearly entered a recession following a decline in GDP over the first two quarters of 2009. If we compare with East Asian countries Malaysia’s GDP growth took more time to overcome contamination, as its GDP growth rate only fell significantly from the third quarter of 2008 and its first negative growth rate was recorded only in the first quarter of 2009 (Table 1). This contamination occurred by a nonstop fall in exports, which has not only reduced industrial production in export-oriented sectors but has also gradually reduced demand indirectly from the domestic manufacturing moreover the services and other sectors. From the list of countries shown in Table 1, only the least developed among them, i.e. Indonesia and the Philippines, recorded positive GDP growth rates over the first two quarters of 2009

During the same period power and electricity, as well as mining and quarry were affected. Because of the dependency on exports, Malaysia’s largest manufacturing industry, i.e. electrical machinery, recorded the highest reduction.

The export oriented sectors that are facing the effect of the failure in demand in developed market has the most reducing effect in manufacturing. In the fourth quarter of 2008 export reduced by -7.5 and -20% in the first quarter of 2009.
Investment:
Investment is very important for any country. In the first quarter of 2009 aggregate demand overcome sharply before declining again in the second quarter. Over the end of 2008 aggregate private investment indicators largely show a fall and the first quarter of 2009. In the third and fourth quarter of 2008 private investment in transport equipment and machinery for industry fell sharply. The most significant indicator of investment, i.e. capital goods, slowed down to 0.2% growth in the third quarter of 2008 before falling sharply by -8.9% in the fourth quarter, declining further by -12.4% in the first quarter of 2009 and -18% in the second quarter. In the first quarter of 2009 Machinery for industry contracted by a massive -45.9%. In the fourth quarter of 2008 and the first two quarters of 2009 import of intermediate goods also fell abruptly. In the fourth quarter of 2008 manufacturing project approvals were the worst affected, with figures falling by -47.8%, -100% in the first quarter and –50% in the second quarter of 2009. These are clear signs of recession and the investment tree is simply confirming that the Malaysian economy was facing recession.
Table 3. Private Investment Indicators, Malaysia, 2007-2009 (% Annual Change)

Over the period 2003-2007 the crisis has also brought implications for investment flows, both inward and outward. Inward foreign investment had risen gradually. However, since 2003 outward investment from Malaysia has risen faster than investment inflows. So over the period 2006-2007 Malaysia has experienced a negative net foreign investment.
Overall, in the second quarter of 2008 Malaysian investments going abroad reached their height before falling sharply thereafter .Southeast Asia has become the leading destination of Malaysian investment outflows, with Indonesia and Singapore being the two most important destinations.
Consumption:
Over the whole of 2008 final consumption expenditure fell gradually, however contracted in the first quarter of 2009 before recovering by 0.6% in the second quarter. In the first quarter of 2009 public consumption slowed down to 2.1% and growth of private consumption fell by - 0.7%.
Table 4. Real GDP by Expenditure, Malaysia, 2007-2009 (% Annual Change)

In the fourth quarter of 2008 sales of passenger cars fell by -10.5%, followed by a further contraction in the first (-10.5%) and second (-11.6%) quarters of 2009. Throughout 2007-2008 credit consumption stayed steady, until the first quarter of 2009 before slowing down slightly in the second quarter. In the first two quarters of 2009 household spending on imported consumption goods declined.
Commodity Prices:
There was a mixed response in the international prices of commodities of Malaysia. For a number of the commodities the effects of the financial crisis do not look obvious. From the second quarter of 2008 until the first quarter of 2009 rubber prices, both local and export fell. However rose in the second quarter of the year .From the first quarter of 2008 until the fourth quarter of 2008 crude palm oil and sawn timber prices for local delivery and exports dropped sharply. But have risen suddenly over the first and second quarters of 2009. The three most important commodities for Malaysia in terms of export value, i.e., palm oil, oil and LNG, show different price movements.
Trade and Balance of Payments:
From the fourth quarter of 2008 Malaysia experienced a contraction in exports and imports. In the first and second quarters of 2009 the fall continued. In the first quarter of 2009 the trade balance improved marginally but dropped again in the second quarter. The trend in falling exports is not encouraging, as it shows a continuous decline in aggregate demand from external effects, which is the main channel through which the global financial crisis has penetrated the Malaysian economy.
Table5. Gross Exports, Imports and Trade Balance

In the fourth quarter of 2008 exports faced a contraction of -11.7% and -19% and in the first and second quarter of 2009 faced contraction of – 22.3%. In the first two quarters of 2009 wood products, petroleum products, toys and sporting goods, and chemicals also experienced a sharp fall in exports.
Currency and Financial Markets
As the sub-prime mortgage stocks did not enter the Malaysian financial system either directly or indirectly through collateral so the direct effects from the implosion in the United States have been minimal. The impact of the global crisis on the financial and currency markets has not been destabilizing thus far.
Exchange Rates:
The improving trend in the Singaporean dollar and Japanese yen has continued. The US dollar fell to its lowest mean of RM3.21 to a dollar in the second quarter of 2008 before recovering steadily to RM3.62 to a dollar in the first quarter of 2009 and RM3.52 to a dollar in the second quarter.
Table 6. Exchange Rates (RM)

Banking:
Liquidity levels in the country remain high with low NPLs, which have given the Government considerable financial stability. Despite the gloomy investment environment, BNM has done well to keep NPLs low. The NPL over total loans ratio was already extremely low prior to the financial crisis. The percentage of NPLs in total loans fell from 4.4% in March 2007 to 2.2% in December 2008, and March and June 2009. The trend is all the more interesting given that the fall has been sustained despite a contraction in GDP over the last two quarters. This fall obviously offers the Government the space to pursue expansionary policies to expand domestic demand.
Stock Market:
Despite the ending of capital controls during the premiership of Abdullah Ahmad Badawi, have ensured that the contraction in aggregate demand arising from a collapse in exports did not trigger a bearish run on the stock market. Bursa Malaysia has also remained fairly steady in 2009. The index fell in the months of January-March 2008, May-October 2008 and March 2009. After falling below 1000 percentage points from October 2008 until April 2009, the index has grown strongly over the period from May to July 2009. News of the Malaysian economy entering a recession following a second-quarter dip in GDP did not dampen the stock market very much. Three reasons explain the lack of a run. Firstly, the Finance Ministry learnt a good lesson from the Asian financial crisis and had kept external borrowings low. Secondly, the regulatory framework and instruments have kept NPLs low. Thirdly, the lack of a run in the stock market reminiscent of the 1997-98 financial crisis is also to some extent a consequence of a lack of major global players providing the leadership for such attacks that were mounted by hedge funds.
Table7. KLSE Composite Index, 2007-2009

Over the first two quarters of 2009 the financial sector has, therefore, remained strong in Malaysia despite the collapse in exports, a fall in oil prices and a contraction in GDP. Over the first two quarters of 2009 the capital and currency markets have also remained steady.
Human Development Infrastructure:
Economic development mainly has two features involving human capital. One is that humans who can create material value in the material world, while the other is that the focus of material development. This section thus examines not only the employment and income effects of the 2008-2009 global crisis, but also whether existing policy targets meet the objective of enabling Malaysia’s human capital to compete in global markets and sustain material improvements in their standards of living.
Impact on Retrenchments and Income:
Unemployment and wage levels are amongst the direct variables to be affected in a recession. The early problems faced by Malaysia include retrenchment, which has resulted in lay-offs, as well as temporary lay-offs and workers facing pay cuts. These all happened because of exports falling and GDP contracting. Manufacturing has been the worst affected sector.
Table 8. Retrenchments, Malaysia, October 2008 until May 2009

In 2008 the unemployment rate became 3.7% which is higher than 3.2% of 2007. The consumer goods and services inflation showed a falling trend from 8.51% in July 2008 to 3.05% in April 2009, which is a consequence of oil prices falling gradually. The fall in inflation to low levels removes the potential for inflation. The contraction in GDP has translated into a fall in labor force participation rates from 2009.

Among the ASEAN nation Malaysia was the fast country responded to global financial crisis. Malaysia’s GDP per capita to contract by -5.1% in 2009 and -0.4% in 2010 whereas government targeted annual average GDP growth rate was of 4.1% for 2006-10 periods. Due to global financial crisis there was a down turn in GDP, consumption, investment and also in export-import. To face this crisis most of the response came from government.
Government Response
To mitigate the effect of global financial crisis Malaysian government undertake multidimensional responses. This response can be classified as: * Monetary Policy * Financial Policy * Economic Stimulus Package (ESP) * ESP 1 * ESP 2 * Additional Policy Measures * Human Development and Social Safety Nets
Monetary Policy
After global financial crisis hits Malaysia’s economy Bank Negara Malaysia increased its degree in expansionary monetary policy. In December 2008 BNM lowered the overnight policy rate (OPR) by 0.25 points (from 3.5 percent to 3.25 percent). By February 2009 OPR was lowered to 2 percent the lowest ever in Malaysia’s monetary policy history. By that time, inflationary pressures had dissipated with the collapse of oil and other commodity prices. This expansionary monetary policy was to support the fiscal stimulus introduced earlier. In order to facilitate the transmission of the rate cuts to borrowers, the statutory reserve requirement (SRR) for banks was reduced from 3.5% in December 2008 to 1% in February 2009. Monthly installment payments on floating interest rate loans were immediately reduced to ensure that interest rate cuts led to an increase in borrowers’ disposable income and higher domestic consumption. Meanwhile the base lending rate by banks was also got reduced. Interest rate reductions had a positive influence on the domestic private debt securities market
Table: Change in Interest Rate | 2007 | Dec 2008 | Jan 2009 | Feb 2009 | OPR | 3.5 | 3.25 | 2.5 | 2 | SRR | 3.5 | 3.5 | 2 | 1 | BLR | 6.72 | 6.48 | 5.53 | - |
Source: Bank Negara Malaysia, 2009
Financial Policy
In 2008 Malaysia started to experience large amount of capital outflow. Like other ASEAN countries Malaysia implemented a full guarantee of all ringgit and foreign currency deposits in financial institutions as a preemptive measure.
Between July 2008 and 2009, three months nonperforming loans peaked in august at 2.5% while the six months nonperforming loans were 2% in July 2008. In July 2009 nonperforming loans for three months were 2.1% and for six months were 1.5%. In June 2009, the highest incidence of nonperforming loans rose as a result of working capital requirements and the purchase of residential property, with the household sector recording the highest number of nonperforming loans.
To increase investment government implemented number of measures to improve financing for small and medium enterprise (SME). In 2008 SME Credit Bureau was established between Credit Guarantee Corporation of Malaysia (CGC) and Dun and Bradstreet. Between 2008 and 2009 BNM introduced three financing incentive and schemes for SMEs. For SMEs facing temporary cash flow problem their loan offering had an interest rate as low as 4% annually. For modernization of SMEs an incentive facility was introduced. In November 2008, RM200 million was channeled to the Micro Enterprise Fund, which can be accessed by SMEs through nine participating financial institutions subject to the normal credit approval process. In January 2009 BNM introduced SME Assistance guarantee Scheme of RM2 billion for SME financing. An 80% guarantee cover for this financing was provided by CGC free-of-charge with the cost borne by BNM. In March 2009 Government issued RM2 billion Merdeka Savings Bond for individuals depending on income from deposits. The bond offered a higher return from deposit because depositors ware affected by lower deposit interest rates.
Economic Stimulus Package (ESP)
During global financial crisis Malaysian government introduced two stimulating package. The first one (ESP 1) was in November 2008 with a size of RM7 billion (US$1.9 billion) or 1.04% of total GDP. The second one (ESP 2) was launched in November 2009 which was of RM60 billion (US$16.2 billion) or 9% of total GDP. By considering two packages together stimulation package was the second highest to GDP among ASEAN countries.

Proportion of Stimulating Package to GDP Country | Stimulating Package(US$ Billions) | Proportion to GDP | Singapore | 13.8 | 10.7 | Malaysia | 18.1 | 10.0 | Philippines | 6.1 | 4.0 | Thailand | 8.3 | 3.3 | Vietnam | 7.0 | 1.1 | Indonesia | 4.5 | 0.9 |
Source: CIMB Research House
ESP 1
The first stimulating package ware prepared to cover the year 2009. Almost 43% of Malaysia’s first stimulus package was for infrastructure, such as the upgrading, repair and maintenance of public convenience (including schools, hospitals, roads, dwelling quarters for police and armed forces, and police stations); building of low-cost houses; public transport; and high-speed broadband infrastructure. Government claimed that the fund will be allocated to projects with high and immediate impact in economy. They are:
Specific Programs & Allocations in ESP 1 | Programs | Allocation (RM million) | 1 | Upgrading, repair and maintenance of public facilities including schools, hospitals and roads | 500 | 2 | Upgrading, repair and maintenance of rural roads | 500 | 3 | Upgrading, repair and maintenance of police stations/camps and quarters for armed forces and police personnel | 500 | 4 | Building additional low and medium-cost houses and enhancing housing programs | 1,200 | 5 | Abandoned housing projects | 200 | 6 | Establishing investment funds to attract private investment | 1,500 | 7 | Accelerating the implementation of the High Speed Broadband project | 400 | 8 | Upgrading and maintenance of public transportation | 500 | 9 | Additional business premises for small and medium entrepreneurs | 100 | 10 | Skills Training Funds | 300 | 11 | Youth skill training programs in private training institutions | 200 | 12 | Enhancing Youth Program | 100 | 13 | Preschool Education | 200 | 14 | Financial assistance to missionary and vernacular schools | 200 | 15 | Others - small infrastructure maintenance projects | 600 | | Total Operational Expenditure | 7,000 | Source: Ministry of Finance, Malaysia, 2009.
ESP 2
Due to worse than expected global trade slowdown Malaysian government introduced the second stimulating package was for 2009 as well as 2010. Almost half (48%) or RM25 billion of the package was directed for assisting the private sector as bank guarantees for SMEs. Another 32% was allocated to infrastructure but of this sum, a substantial portion is for maintenance rather than new spending on public facilities. ESP 2 aims to reduce unemployment and increase employment opportunities, ease the burden of citizens, assist the private sector in facing the crisis, and build capacity for the future.
Specific Programs & Allocations in ESP 2 | Programs | Allocation (RM million) | 1 | Reducing unemployment and increasing employment opportunities | 2,000 | 2 | Easing the burden of citizens | 10,000 | 3 | Assisting the private sector in facing the crisis | 29,000 | 4 | Building capacity for the future | 19,000 | | Total Operational and Development Expenditure | 60,000 |
Source: Ministry of Finance, Malaysia, 2009.
An important thing in ESP 2 is direct stimulating package is only RM18 billion, comprising RM15 billion of direct fiscal stimulus and RM3 billion in tax incentive. The remaining RM42 billion are in form of guaranteed funds, equity interest and private finance initiative and off budget initiative.
Additional Policy Measures
Malaysian government brings some change in policy for restructuring the economy and improving its competitiveness. They are: * Fund management, unit trust and stock broking * Attracting human capital * Deregulation of Foreign Investment Committee guidelines * Establishment of Ekuiti Nasional Berhad (A private equity company owned by the Government of Malaysia) * Liberalization of 27 services sub-sectors * Removal of 30% Bumiputera participation quota (An equity quota for recidence) * Institutional framework

Human Development and Social Safety Nets
Since the financial crisis of 1997-98 social safety nets (SSNs) have become a prominent issue in Malaysia. To mitigate the effects of the crisis on the poor and low-income groups, the Government reallocated the budget to support these social sectors and set up targeted programs. This SSN support is provided by various ministry and government agencies like ministry of health, education, housing and local government etc. this support comes in various form like financial aid, food, fertilizer and fuel subsidiary, free education and skill training etc.
In 2008 Malaysian government increased SSN allocation from RM350 million to RM850 million. And this support was given trough social welfare department under women, family and community development ministry.
In February 2009 SSN support reached a new level, they introduced a new Social Safety Net Card. Welfare aid was given to those household in Peninsular having a monthly income less RM430, RM520 in Sarawak and RM540 in Sabah. In 2009, these were revised to RM720 in Peninsular Malaysia, RM830 in Sarawak and RM960 in Sabah.
On the other hand several measures were taken for human development. This include providing training and creating employment opportunities, extending financial support for education at Masters and PhD levels, and attracting skilled workers by granting permanent residence status. To provide training and job placement for 100,000 people an allocation of RM700 million was done. Also government started subsidies for basic food items, improvement of healthcare facilities in the rural areas of Sabah and Sarawak, financial assistance to and improvement of daycare center, shelter homes and childcare center.

The Malaysian economy, given its high degree of openness, was affected by the global recession which set in during the third quarter of 2008 and continued into the first quarter of 2009. With the steadiness of the global financial markets and the succeeding recovery in the economies of the advanced countries, the quick policy reactions on both the fiscal and monetary fronts had a significant role in nourishing domestic demand during this period. Malaysia’s sound economic rudiments, strong financial structure and the application of complete policy maintenance actions stopped the economy from gliding into a severe and extended period of negative growth. The strong economic and financial fundamentals provided the basis for a quick recovery. The strength and constancy of the domestic financial system during this period ensured that financing continued nonstop and enabled the private sector to obtain access to credit. Attached with the healthy private sector financial position, this simplified a fast recovery in domestic demand once the global financial crisis was confined and the global economic and financial conditions steadied. These fundamentals enhance the projections for a tougher rescue going onward.

Reference: 1. Dr.AHMED.S. Global Financial Crisis: Impact on Bangladesh. 2. ANNUAL REPORT (2009)[WWW].Available from: http://www.bnm.gov.my/files/publication/ar/en/2009/cp01_001_whitebox.pdf [Accessed 01/11/2015/] 3. KHOON.G.S and MAH-HUI.M.L(2010) The Impact of the Global Financial Crisis: The Case of Malaysia, PP 13-23 4. The Global Financial Crisis and the Malaysian Economy: Impact and Responses[WWW].Available from: http://www.isis.org.my/attachments/e-books/The_Global_Financial_Crisis_and_the_Malaysian_Economy.pdf [Accessed 1/11/2015]

Appendix: 1. Economic stimulus package 1

2. Economic stimulus package 2