In 1997/98 Asian Financial Crisis, the Malaysian Stock Market dropped from 900 in 1997 to 200 in 1998, and the Ringgit dropped by about 40 percent in a year.
Let me attempt to recall the crisis from memory. There was a period of uncertainty from the start of the Asian Financial Crisis. Thailand was the first country affected. The Baht was shorted heavily. The Thai government supported its currency initially but subsequently was unable. The next country to be affected was Indonesia and its currency, the Rupee. Malaysia was initially not affected but not for long. In fact, Malaysia was able to help Thailand and Indonesia in the onset of the crisis by extending billion ringgit loans to help them support their currencies.
When the crisis affected Malaysia, there was also an initial period of great uncertainty. The Minister of Finance and the central government implemented various policies. Many of these were however unable to stabilise the crisis. The Malaysian Stock Market continued its free fall. When the market fell to 600, many thought the market was trading at a bargain at that level. Many good and fundamentally strong counters were also down with the market.
Subsequent falls in the market proved those who bought to be wrong for the short term. The market was not reacting to fundamentals for that period. Those using "fundamentals" to guide their purchases caught the "falling knife/knieves". The market got pushed down further, 500, 400, 300 and eventually capitulated to a low of 200+. On that faithful day before the implementation of drastic measures by the central government, everyone wanted to get out of the market, at any price! It would seem that there was little or even no value in any Malaysian assets on that memorable day. Panic was obvious.
I recalled the ringgit was MR 2.20 to US 1.00 before the crisis. The ringgit dropped drastically. It was soon MR 3 to US 1.00. Soon, it was MR 3.50, MR4 and even MR 4.50 (?). The falling Ringgit affected those Malaysians who were supporting their children's education overseas. Some had to stop their studies. Others suffered greatly, having lost money in the stock market and now paying almost double for the education fees in ringgit terms. These were sums in the tens or hundreds of thousand ringgits. The hardship was real and painful.
The local banks were deemed not safe to put your money. Soon there were large numbers of withdrawals from the local banks. Depositors withdrew from local banks when rumours were rampant might collapse. These same depositors parked their money into Singapore and other foreign banks. Some opened foreign currencies accounts in Singapore. A lot of money flowed out of the country too. For short and long term deposits, the interest was a high of >10% for that period of uncertainty.
Economy was down. The traders and the businesses were in deep trouble. It was difficult to get new loans or financing. The banks were tight of liquity and was unwilling to extend credit. One would be lucky not to have one's credit facility withdrawn. Those carrying large loans or debts were particularly suffering as interest rate was very high indeed. How to make money? Contracting economy, poor business sentiment and high cost of doing business translated into losses for many businesses.
On hindsight, what would you have done differently during the Asian Financial Crisis?
Are there lessons here to guide the investors on the present Global Financial Crisis?
Visit this post to learn how Malaysia got out of the Asian Financial Crisis.
http://profitmaking188.blogspot.com/ : Malaysia's Self-Prescribed Rescue Debated
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