The Malaysian Economy after the Global Financial Crisis: International Capital Flows, Exchange Rates, and Policy Responses

The exchange rate of the Malaysian ringgit (RM) against the US dollar (USD) after returning to the managed float system in July 2005 was hovering around 3.00–3.50 RM/USD until the middle of 2014. Following the subprime mortgage problem that emerged in the second half of 2007 and the Lehman shock in September 2008, the US introduced a de facto zero interest rate policy and quantitative easing (QE), and other advanced countries have implemented large-scale monetary easing in order to cope with the Global Financial Crisis. As a result, a large amount of money flowed into the stock and bond markets of many emerging countries including Malaysia. This trend reversed completely when Mr. Ben Bernanke, the then chairperson of the Federal Reserve Bank (FRB) of the United States, made remarks suggesting the end of QE at the Joint Economic Committee of the House of Representatives on May 22, 2013. The capital that flowed under QE began flowing out from Malaysia, and the financial account was in deficit for seven consecutive quarters from the third quarter of 2013 to the first quarter of 2015. The RM/USD exchange rate was stable at the beginning of this reversal, but the ringgit depreciated rapidly, 42.1% in the one year from the end of August 2014, when crude oil prices began to fall. In addition to the conversion of the US monetary policy and the decline in crude oil prices, the debt problem and political scandals of One Malaysia Development Bank (1MDB) added depreciation pressure on the ringgit. The objective of this study is to investigate the nature and characteristics of international capital flows and the exchange rate, and policy response of the central bank of Malaysia, Bank Negara Malaysia (BNM). The structure of this paper is as follows. In Section II, we will illustrate the structure of the Malaysian economy and the policy responses after the Asian currency crisis in 1997 and 1998 as the foundation of the discussion in this paper. Section III discusses the trends in international capital flows and exchange rates, and BNM’s policy responses and their effects.