DEC5028 MACROECONOMICS

Assignment:
The Asian Economic and Currency Crisis and its World
Repercussions: A Country Study

MALAYSIA & BRAZIL

DP 51-52


Group Member:

No. Id Name
1 1111114363 Nur Assyiddiq Bin Zainal
2 1111114082 Mohamad Rizal Bin Zainon Abidin
3 1111113370 Muhammad Syamir Bin Ismail
4 1101107242 Cheong Wan Qian
5 1111112040 Puteri Nurul Syakinah


Lecturers Name: Ms. UMMU UMAIRAH BINTI MOHD YUNUS




Marks



/ 5
COUNTRY INTRODUCTION

Malaysian currency crisis 1997-1998
The Asian financial crisis was a period of financial crisis that gripped much of Asia
beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial
contagion. The Economy of Malaysia is a growing and relatively open state-oriented and
newly industrialised market economy. The state plays a significant but declining role in
guiding economic activity through macroeconomic plans. From 1988 to 1997, the economy
experienced a period of broad diversification and sustained rapid growth averaging 9%
annually. Before the crisis, Malaysia had a large current account deficit of 5% of its GDP. At
the time, Malaysia was a popular investment destination, and this was reflected in KLSE
activity which was regularly the most active stock exchange in the world (with turnover
exceeding even markets with far higher capitalization like the New York Stock Exchange).
Expectations at the time were that the growth rate would continue, propelling Malaysia to
developed status by 2020, a government policy articulated in Wawasan 2020. At the start of
1997, the KLSE Composite index was above 1,200, the ringgit was trading above 2.50 to the
dollar, and the overnight rate was below 7%.The year 1997 saw drastic changes in Malaysia.
Foreign direct investment fell at an alarming rate and, as capital flowed out of the country,
the value of the ringgit dropped from MYR 2.50 per USD to, at one point, MYR 4.80 per
USD. The Kuala Lumpur Stock Exchange's composite index fell from approximately 1300 to
nearly merely 400 points in a few short weeks. In 1998, the output of the real economy
declined plunging the country into its first recession for many years. The construction sector
contracted 23.5%, manufacturing shrunk 9% and the agriculture sector 5.9%. Overall, the
country's gross domestic product plunged 6.2% in 1998. During that year, the ringgit plunged
below 4.7 and the KLSE fell below 270 points. Growth then settled at a slower but more
sustainable pace. The massive current account deficit became a fairly substantial surplus.
Banks were better capitalized and NPLs were realised in an orderly way. Small banks were
bought out by strong ones. A large number of PLCs were unable to regulate their financial
affairs and were delisted. Compared to the 1997 current account, by 2005, Malaysia was
estimated to have a US$14.06 billion surplus. Asset values however, have not returned to
their pre-crisis highs. In 2005 the last of the crisis measures were removed as the ringgit was
taken off the fixed exchange system. The powerful negative shock also sharply reduced the
price of oil, which reached a low of about $11 per barrel towards the end of 1998, causing a
financial pinch in OPEC nations and other oil exporters. The reduction in oil revenue also
contributed to the 1998 Russian financial crisis. It was the start of a chain reaction in which
half a dozen other economies of the region suffered speculative attacks and had their
currencies devalued. As a result, stock markets fell as local companies debts and profit
forecasts were reviewed under the new exchange rate rgimes.

Brazil currency crisis 1997-1998
Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s. IN
1998 and 1999, the majority of Latin American countries suffered a severe economic
recession that drove corporations into insolvency and thus forced many to close down. Brazil
had its own problem before the Asian economic crisis. Before the crisis, a decade of inflation
rates ranging from 100% to nearly 3,000% per year, Brazils central bank made an effort
during the 1990s to reign in inflation and public spending. In 1994, the government reissued
the real and instituted a crawling peg. The new currency, in combination with interest rates in
excess of 30%, stabilized inflation for the first time in decades. High interest rates lowered
inflationary pressures, by reducing the incentive to hold currency. Investors, attracted by high
interest rates, poured money into the Brazilian economy at unprecedented rates. Brazilian
stock markets enjoyed an upward trend during the whole first semester of 1997. From
January 1
st
to July 8
th
1997, when it reached its annual high, the Ibovespa, the Brazilian main
market index, rose from 7,040 points to 13,617, a spectacular rise of 93.4%. While this flow
was positive, emerging market economies experienced growth, since this capital financed
imports, credits to the private sector, consumption credits for individual citizens and, also, the
cash for external debt payments. However, short-term capital has a speculative, volatile and
erratic character. This is evident from the abrupt decrease of the flows, which started from
1996, continued in 1997 with the Asian crisis, and deepened in 1998 with the Russian crisis
and in 1999 with the Brazilian crisis. The Asian crisis spilled over quickly, via Russia, to
Brazil - thus, to Latin America. Brazil had economic policies similar to those put forward in
East Asia, maintaining high interest rates to attract capital, with the purpose of defending the
fixed exchange rate tied to the dollar. In July 15
th
1997, marked the opening of a new, and
grimmer period as the Asian crisis take effects. Foreign direct investment grew by 140% over
the year before. The recession also caused the deterioration of the banking systems financial
situation and massive lay-offs that increased the existing unemployment level and caused the
loss of purchasing power among large sectors of the population. The Hong Kong stock
market crash, at the end of October, effect also reached Brazil immediately. By the end of the
week the index had accumulated a 15% loss. The next seventy days were a period of very
high volatility, during which Ibovespa had many up and downturns around the average of
roughly 12,000 points. The crash on October 23rd caught most players in the domestic
financial institutions off-guard, after some three weeks in which the market gained upward
momentum, as fundamental prospects for the Brazilian economy seemed to be improving.
Thus resulting in a loss of one third of market value after the crisis.

ECONOMIC INDICATORS

1.1 Real Output Growth
Malaysias real Gross Domestic Product (GDP) growth is expected to moderate to 8%
in 1997 (1996: 8.6%). The moderation in output growth is mainly due to an envisaged slower
pace of economic activities in the second half of the year as a result of slower construction
starts and output growth of construction-related manufactured materials and services. Output
growth of consumption goods, especially durables, is also envisaged to expand at a slower
pace due to the combined impact of slower growth in export earnings, fiscal prudence,
monetary restraint, effort aimed at promoting and mobilizing saving as well as the determent
of spending in response to the depreciation of the value of ringgit and deflation of share
prices. The moderation in domestic demand growth against a slower but still robust output
growth has enabled inflation to remain low, despite the weaker ringgit.
Global growth in 1999 seems likely to be in the range of 2percent for the second
consecutive year, well below the historical average of nearly 4 percent. This underscores the
continuing costs ofthe Asian crisis, its repercussions, and the crises thathave afflicted
financial markets more broadly in1998. At the same time, the balance of risks still seems to
be predominantly on the downside. Projected growth in the world economy in 1999 has been
lowered only modestly from the October 1998, about the same growth rate as estimated for
1998. The recession now appears deeper and longer than previously projected, and in other
countries reflecting the crisis in Russia and the subsequent contagion to other emerging
markets, including Brazil.


1.2 Inflation
1997-1998 with projected slower growth in domestic demand as well as the pursuance of
fiscal discipline and monetary restraint, inflation is likely to remain low. The depreciation of
the ringgit is not expected to push up the price of imports significantly, as slower growth in
the volume of world output especially manufactured goods is expected to force producers
worldwide to cut prices in order to get a greater market share, as evidenced in the recent
decline in the prices of electrical and electronics products. More conscious efforts in
procuring imports from cheaper sources as well as to generate local substitutes to alleviate the
impact of ringgit depreciation would also contribute to keep imported inflation in check.
The inflation rate in Malaysia was recorded at 1.4 percent in July of 2012. Historically,
from 2005 until 2012, Malaysia inflation rate averaged 2.7 percent reaching an all-time high
of 8.5 percent in July of 2008. Inflation rate refers to a general rise in prices measured against
a standard level of purchasing power. The most well-known measures of inflation are the CPI
which measures consumer prices, and the GDP deflator, which measures inflation in the
whole of the domestic economy. Besides that, the inflation rate in Brazil was recorded at 5.2
percent in July of 2012. Historically, from 1980 until 2012, Brazil inflation rate averaged
419.3 percent reaching an all-time high of 6821.3 percent in April of 1990 and a record low
of 1.7 percent in December of 1998. Inflation rate refers to a general rise in prices measured
against a standard level of purchasing power.
1.3 Openness
Propose that can have a positive impact on growth, but openness may not
automatically lead to growth. A problem of economic openness is not less openness but more
openness. There is nothing wrong with Malaysia being so trade dependent; it cannot afford to
be otherwise. The question, rather, is whether the Malaysian economy is too trade dependent
for its own good. Rhetoric aside, the optimum trade level relative to a countrys GDP can
only be determined by market forces, not by administrative fiat. For market forces to work
effectively there is a need first to eliminate all distortions in the market place.



1.4 Savings
Productivity can also be increased by ensuring a more efficient utilization of available
resources by both the public and private sectors. Therefore, in the conduct of fiscal and
monetary policies, the major thrusts are to promote savings and reduce wastage so that a
larger portion of national resources can be channeled for more productive investment.
1.4 The balance of trade
Balance of trade Malaysia:
Year
Trade
Balance
(RM Billion)
1997 10.15
1998 11.34
1999 33.36
2000 61.81
2001 54.05
2002 54.34
2003 81.35
2004 81.62
2005 103.36
2006 111.09
2007 102.26
2008 143.21
2009 117.85
2010 109.99
2011 120.32

1.5 Current account
Current account deficits peaked at around 10 percent of gross domestic product (GDP) in
Malaysia in 1995 and at 8 percent of GDP in Thailand in 1996 (compared with 7 percent in
Mexico around the time of the peso crisis in 1994). Deficits were also large in the Philippines
and Indonesia, at around 4 percent of GDP. During the crisis years of 199798, deficits
became surpluses that persisted for years (in the Philippines this occurred much later).
Malaysias surpluses rose to around 15 percent of GDP after its crisis, whereas they declined
in Thailand (turning to a small deficit for a time) and Indonesia. The current account reversals
to surpluses were associated with a sudden stop in capital inflows. From 1999 until 2011,
Malaysia Current account averaged 18277.8 Million MYR reaching an all time high of 38598
Million MYR in September of 2008 and a record low of 5366 Million MYR in June 2002.
1.6 The stock of foreign reserves
In 1997-98: Foreign reserves can come from the annual trade surplus balance of
payments items such as tourism and incomes from abroad, and the inflow of foreign funds
either long term or short term. The equity market is where a very substantial amount of the
nations capital resources are being invested. In 2010, total market capitalization of Bursa
Malaysia stood at more than RM2 trillion. The values of the shares in the stock exchange are
very much linked to the value of the currency. Like the currency commodity, the shares
commodity is sensitive and volatile to changes to general economic, global and financial
market fundamentals.
Before 1997: The exchange rate policy had pegged to the dollar. Although these
smaller East Asian countries used a variety of exchange rate systems, their common peg to
the dollar provided an informal common monetary standard that enhances macroeconomic
stability in the region. The debtor countries Indonesia, Korea, Malaysia, Philippines and
Thailand were forced to float, let their currencies fall precipitately when they were attacked.
A floating exchange rate is determined by the market force through supply and demand.
After 1998: Malaysia exchange rate was fixed. Under the fixed exchange rate policy,
Malaysia was able to sustain and attract inward foreign investment due to the lower costs of
production compared to others affected countries. Due to this, the policy helped do much to
ensure Malaysia competitiveness is lasting even under the crisis pressures
1.6 The way the current account deficit was financed and the size and composition of
external debt (bank versus non-bank borrowing, private versus public sector borrowing,
private versus public creditors of the country)

The Malaysian government has been struggling with its budget deficit for over a decade as it
has tried to balance its revenues and expenditures amidst a global rise in food and energy
prices. The Malaysian government has found it necessary to subsidize food and energy prices
to keep the poor off the streets. Increasing subsidy bill as the main cause of its perennial
budget deficit. The fiscal deficit which was about 5.5% of GDP in 2000 declined to 2.7% of
GDP in 2007 before it climbed very rapidly to 7% of GDP in 2009 due to rising fuel prices
and the consequent increase in subsidies and public expenditures. Despite government efforts
to reduce subsidies, widen the tax base, increase revenues and reduce expenses the budget
deficit was about 5% in 2010. The budget deficit is projected to be about 5.6% of GDP in
2011.
The post-2009 government has tried both to bring down the rate of inflation and the budget
deficit and at the same time it has tried to reduce the ballooning subsidy bill. The subsidies
were given not only to ease the burden of the lower classes, but also to reduce possible class
tensions that may arise as a result of rising income inequalities. However, the budget deficit
has been persistent. It has remained around the 5.5% region. The government has argued that
the RM73 billion expenditure on subsidies a year is clearly unsustainable. These subsidies are
necessary to keep the prices of essential items stable. These essential items range from flour
to fuel.
The government has been considering the possibility of implementing a Goods and Services
Tax (GST) to increase revenues. The GST is a favorite among IMF economists and armchair
economists who argue that the GST will not hurt the poor because it is targeted at the middle,
upper and elite classes and the tourists. The government has, however, hesitated in
implementing the GST several times because of the lack of infrastructure to effectively
collect the taxes and also because it may be inflationary.
The government quite rightfully wants to contain the budget deficit because it does not want
to wake up to a Greek problem of an unsustainable budget deficit. It does not want to go into
debt although most of its borrowings are from the domestic capital market. However, in
going to the domestic capital market it may crowd out the private sector, on which it is
dependent to increase investments under Najibs New Economic Transformation Program.

The traditional policy response to financial difficulties has been to seek assistance from the
IMF for improving the situation. For such assistance the countries in trouble invariably have
to undertake economic and financial reforms, impart more transparency to government
spending, and make the necessary macroeconomic adjustments. They must initiate measures
to revitalize their economic and monetary systems. Thailand and Indonesia took steps to
remedy their weaknesses. Korea too joined in. But these countries soon found the crisis
beyond their control, and decided to seek assistance from the IMF. Following the IMF
conditions for the help, these countries had to implement tight monetary and fiscal policies,
and had to enforce the prescribed structural reformations, particularly in the financial sector.
Malaysia did not approach the IMF but tried for
about a year the same measures as the institution prescribes. For example, for over a year it
followed a tight monetary policy through raising interest rates.
The real economy started shrinking. Many projects on the anvil had to be dropped, those in
progress were slowed down, and public expenditure was curtailed. Several allowances to
government employees were abolished or reduced, and many foreign workers had to leave.
But neither the
fiscal contraction, nor the tight money policy, the conventional tools, could ameliorate the
situation. Real GDP registered a fall of about 6% during the worst span of about a year, the
construction industry being among the worst sufferers. The country could still approach the
IMF for assistance. But such assistance never came without restrictions, and the experience
of the developing countries had seldom been encouraging. Restrictions abridged the
recipients freedom of action, at times their priorities clashed with the restructuring
requirements of the IMF. There often was also a mismatch between the repaying capacity of
the country and the repayment schedules. Since Malaysian economic fundamentals were not
weak, policy makers considered the
imposition of controls over capital outflows as a better alternative. It needed conviction in an
atmosphere loaded with the new urges for liberalization and openness. It was a decision to
swim against the current, and was quite risky.
On September 1, 1998 Bank Negara Malaysia announced controls on foreign capital flows to
curb the speculative demand for the ringgit, and prevent its internationalization. The
following day it pegged the local currency at RM 3.80 to a US dollar. The rate was 10%
higher than the level the ringgit had already depreciated to. The announcement thus
formalized the devaluation of the ringgit by 34%. However, Malaysian controls were quite
selective, and were essentially designed to support the countrys recovery plan. They left
direct foreign investment untouched, and current account transactions remained fully
convertible. The details of the package are now available in the Bank Negara Report
1998.For example, banking institutions having the required capacity to lend were encouraged
to achieve a minimum loan growth target of 8% in due course of time, conditions for lending
to construction companies were eased, ceiling on loans for purchasing shares and units were
relaxed, financing margin for all passenger cars was raised, and minimum monthly repayment
on credit cards was reduced. Thus, avoiding the IMF assistance, and the accompanying tight
money policy, restructuring programs, austerity measures, and other conditions, Malaysia
chartered a new course to put the economy back on track.

Brazil Before and During crisis:
According to a report released by the Central Bank (BC), Brazils current account deficit
widened more than expected and foreign direct investment decreased in April as a weakening
global economy hit Brazilian exports and prompted companies to repatriate more profits
abroad.The current account deficit reached US$ 5.4 billion, the worst data since 1947, and
more than the US$4 billion estimated by the market. Along with a weak trade surplus (US$
882 million), the robust (and much more than expected) remittance of profits and dividends
(USD 2.4 billion) contributed to this significant deficit. Over 12 months, the current account
gap widened to USD 51.8 billion, or 2.05% of GDP (up from 1.99% in March).
In 1999: Fernando Henrique Cardosos victory in the Brazilian presidential election would
serve to inoculate Brazil from the devaluation virus. Cardoso, architect of Brazil's "Plan
Real," was to implement structural adjustments and economic reforms designed to satisfy the
conditions set by the International Monetary Fund (IMF) for a $41.5 billion loan. This $41.5
billion was deemed more than adequate to bolster Brazil's dollar reserves and protect the real
from speculative attack or capital flight, despite a rising current account deficit, budgetary
problems, and rising levels of dollar denominated debt in the Brazilian corporate sector.
But at the end of the day, Cardoso could not deliver. He was unable to get the IMF supported
budget (with tax increases and spending cuts) or the economic reforms (particularly
liberalization of the pension system) through the Brazilian legislature.The well heeled in Rio
and Sao Paolo became convinced that devaluation of the real was inevitable and began
shifting their wealth out of Brazil and into bank and brokerage accounts in the U.S., Europe,
and off-shore havens. The more dollars fled Brazil, the more negative expectations about
Brazil's future, particularly the future value of the real. The more negative the expectations,
the more the capital flight.
In an effort to defend the real, the Brazilian Central Bank pushed up interest rates to nearly
50%. In fact, the high interest rates raised the cost of servicing debt, both public and private
debt, to levels that were so high that investors became even more certain that a major default
would occur, followed by a subsequent collapse in the dollar value of the real. The high
interest rates only speeded up the fall in asset prices in the Brazilian economy, reducing the
collateral backing existing loans, increasing the rate and risk of bankruptcies, and placing
extraordinary burdens on the entire financial system.
For whatever reason, President Cardoso and his advisers decided that the solution was a
devaluation. He had earlier pledged not to devalue. The devaluation threatens the financial
health of many Brazilian firms, particularly but not only those exposed to foreign exchange
risk. To make matters worse, credit agencies, who were criticized for being too slow to
reassess the Asian economies, are now downgrading Brazil's sovereign debt. This will further
raise borrowing costs and create even tighter credit conditions for the entire Brazilian
economy. The devaluation will raise the costs of imported inputs to industry, as well as
imported consumer goods.
These are the short-term solution to the Brazilian crisis. There are two distinct and opposed
possibilities and a wide range of possibilities in between. The Brazilian government could
either abandon any attempt to control the exchange rate and, therefore, stop frittering away
the Central Bank's dollar reserves trying to keep the real within its targeted trading band or
the government could simply fix the exchange rate in a manner that does not require
managing the real. This latter approach could be achieved by copying the Argentinean
currency board (or even joining that currency board). The currency board solves the most
difficult problem in a fixed exchange rate regime by controlling domestic monetary growth.
There is always, however, concern that a currency board would take away the flexibility of
the Central Bank to respond to economic crises and could lead to even worse economic
downturns than might occur under a freely floating currency.
The Brazilian government has decided to float the real against the dollar. This will help to
solve one of the structural problems that was deemed a negative factor in Brazil's economy.
Dollar equivalent wages in Brazil will fall precipitously. For exporters, this will mean,
potentially, a big boost in profit rates.
Addendum (Jan. 18, 1999):

Brazil after crisis:
Characterized by large and well-developed agricultural, mining, manufacturing, and service
sectors, Brazil's economy outweighs that of all other South American countries, and Brazil is
expanding its presence in world markets. Since 2003, Brazil has steadily improved its
macroeconomic stability, building up foreign reserves, and reducing its debt profile by
shifting its debt burden toward real denominated and domestically held instruments. In 2008,
Brazil became a net external creditor and two ratings agencies awarded investment grade
status to its debt. After strong growth in 2007 and 2008, the onset of the global financial
crisis hit Brazil in 2008. Brazil experienced two quarters of recession, as global demand for
Brazil's commodity-based exports dwindled and external credit dried up. However, Brazil
was one of the first emerging markets to begin a recovery. In 2010, consumer and investor
confidence revived and GDP growth reached 7.5%, the highest growth rate in the past 25
years. Rising inflation led the authorities to take measures to cool the economy; these actions
and the deteriorating international economic situation slowed growth to 2.7% for 2011 as a
whole, though forecasts for 2012 growth are somewhat higher. Despite slower growth in
2011, Brazil overtook the United Kingdom as the world's seventh largest economy in terms
of GDP. Urban unemployment is at the historic low of 4.7% (December 2011), and Brazil's
traditionally high level of income equality has declined for each of the last 12 years. Brazil's
high interest rates make it an attractive destination for foreign investors. Large capital inflows
over the past several years have contributed to the appreciation of the currency, hurting the
competitiveness of Brazilian manufacturing and leading the government to intervene in
foreign exchanges markets and raise taxes on some foreign capital inflows. President Dilma
ROUSSEFF has retained the previous administration's commitment to inflation targeting by
the central bank, a floating exchange rate, and fiscal restraint.
ref: Index Mundi


Conclusion: Based on information given above, Id agree on investing in Malaysia country
since the government financed the country deficit rather excellently. There is pros and cons
when Dato Mahathir Mohamed didnt take up IMF for Malaysia, its good that Malaysia does
not need IMF to resolve Malaysia financial crisis problems. It made the country more safer
because Malaysia become less exposed to foreign influences in economic segments. Brazil on
the other hand, does not seems reliable to invest in, because based on economic indicator
stated above the economy of Brazil is less stable compared to Malaysias. Besides it had not
only reinforced the negative expectations in the financial markets and community of the
Brazilian well-to-do, but destroyed one of the most precious non-physical assets that any
government can have, credibility. the Brazilian economy is more exposed to foreign
influences. Negative sentiments in global financial markets can more efficiently and quickly
be transmitted into the Brazilian economy via a falling value of the real vis-a-vis dollars. This
means that any drastic actions by Brazilian governors, such as debt moratoria, or continued
intransigence by the Brazilian legislature would have rather immediate negative
consequences for Brazilian workers and consumers.
Brazil under IMF, thus exposed to foreign threats, Malaysia no IMF thus more stable not
exposed to forgein economic company make comparison with Malaysia. In conclusion, it is
better to invest in Malaysia.
1.8 FISCAL POLICY
Fiscal policy is the use of government spending and taxation to influence the
economy. These policies affect tax rates, interest rates and government spending, in an effort
to control the economy. When the government decides on the goods and services it
purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal
policy.
Fiscal policy in Malaysia
Before 1997: The Malaysian government played a key role in the economy.
Government participation in the economy expanded further in 1980-82 as it pursued an
expansionary countercyclical fiscal policy aimed at stimulating economic activity and
sustaining growth to ride out the effects of the global recession. The countercyclical policy
led to twin deficits in the governments fiscal position and the balance of payments.
After 1998: Malaysia keeps all policies under constant review, to respond to
changing circumstances. During 1998-2002 monetary conditions also supported the
expansion of private sector activities. Interest rates were cut to historically low levels in 1999,
with the intervention rate reduced .In pursuing expansionary demand management policies,
care was taken that fiscal and monetary measures would not unduly risk creating imbalances
which might jeopardise the long-term growth potential, price stability or gains made in
achieving a robust balance of payments.
Fiscal policy in 2012: Is geared towards stimulating domestic economic activity and
providing support to the economic transformation plan. A key challenge for the Government
in 2012 is to continue providing support to domestic demand amid the weakening external
sector while ensuring that the scal position remains sustainable. In this regard, greater
emphasis has been placed in the 2012 Budget on generating growth through private sector
investment and consumption. The Federal Government scal decit is expected to narrow
further from 5.0% in 2011 to 4.7% of GDP in 2012. Revenue collection is expected to
improve to RM186.9 billion, supported by better tax administration and higher compliance in
tax submission and collection.


Fiscal policy in Brazil
Before 1997: Inflation and monetary correction have practically disappeared in
Brazil , the country continues to use a strange concept to measure the behavior of fiscal
policy , the primary surplus. This is the difference between government revenues and
government expenses without including one major expense which is nominal interest
payments. As far as we know, Brazil is the only country that emphasizes this primary
surplus, as opposed to the more normal concept of government deficit in nominal terms,
including all revenues and expenses.
After 1998: Both government revenues and current government expenditures are
growing much faster than GDP, while public investments are being restricted and nominal
interest payments are becoming less important in the government budget . In other words, for
a given level of primary surplus, the government deficit is in fact increasing dramatically.
Worse, the growth of the deficit is being accompanied by a huge growth of the size of
government revenues and expenditures.Fiscal policy is becoming a mess, a growing public
deficit, a growing tax burden and a low level of public investments.The right thing to do
would be to diminish the public deficit, with more investments and less taxes.
Recently: Brazil plans to rely more on interest-rate cuts than fiscal stimulus to ensure
economic growth quickens to an annual pace of 5 percent by the end of 2012. Tax cuts on
consumer loans, home appliances and food staples announced December, were narrowly
focused to help companies and retailers reduce inventories and pose no threat to the
governments fiscal target in 2012 . The steps taken, including targeted tax breaks for
industry earlier this year, should be enough for Latin Americas biggest economy to regain its
footing and grow at least 4 percent in 2012.
Conclusion: As a conclusion ,in Malaysia a strong commitment to fiscal sustainability is
critical for macroeconomic stability as well as to ensure sustainable long-term growth.
Malaysia continues to enjoy flexibility in expanding its fiscal position, which remains
sustainable given the governments fiscal prudence and discipline compare to Brazil. For
Brazil a strange concept have been used to measure the behavior of fiscal policy, primary
surplus. As far as we know, Brazil is the only country that emphasizes this primary
surplus, as opposed to the more normal concept of government deficit in nominal terms,
including all revenues and expenses Brazil should abandon as soon as possible this emphasis
on primary government surpluses. It is meaningless.
1.9 MONETARY POLICY
Monetary policy is the actions of a central bank, currency board or other
regulatory committee that determine the size and rate of growth of the money supply, which
in turn affects interest rates. Monetary policy is maintained through actions such as increasing
the interest rate, or changing the amount of money banks need to keep in the vault (bank
reserves).
Monetary policy in Malaysia
Before 1997: The monetary policy strategy had been based on targeting monetary
aggregates. This was an internal strategy and was not formally announced to the public. The
deployment of this strategy was based on evidence that the monetary aggregates were closely
linked to the ultimate objectives of monetary policy. In a correlation test conducted using
quarterly data from 1980 to 1992, monetary growth (M3) was shown to be positively and
highly correlated with inflation. Given that price stability was the ultimate objective of
monetary policy, monetary targeting was seen as a suitable target for policy. During this
period, the central bank, Bank Negara Malaysia (BNM) influenced the day-to-day volume of
liquidity in the money market, consistent with the monetary growth target.
After 1998: The policy response to the Asian crisis , the ability of BNM to influence
domestic interest rates based on domestic considerations had been affected by the volatile
short-term capital flows and the excessive volatility of the ringgit during the Asian financial
crisis. In 1998, given the risk of large capital outflows due to higher interest rates offered in
the offshore market to attract ringgit funds for speculation on the ringgit, BNM was not able
to lower interest rates to contain a further contraction in the economy.
Recently: Monetary policy in 2012 will continue to operate in a complex global
environment characterised by slower growth, rising uncertainties and increased volatility in
the nancial and commodities markets amid high liquidity in the international monetary
system. The Malaysian economy entered 2012 with increasing downside risks to growth amid
softening inationary pressures domestically. Monetary policy in 2012 will focus on ensuring
the sustainability of economic growth in an environment of price stability.
Monetary policy in Brazil
Before 1997: Rampant inflation became the most harmful problem of Brazil's
economy The Plano Real ("Real Plan"), instituted in the spring 1994, sought to break
inflationary expectations by pegging the real to the U.S. dollar. Inflation was brought down to
single digit annual figures, but not fast enough to avoid substantial real exchange rate
appreciation during the transition phase of the Plano Real. This appreciation meant that
Brazilian goods were now more expensive relative to goods from other countries, which
contributed to large current account deficits.
After 1998: Monetary policy in Brazil after price stabilisation was characterised by
an excessive tightness. For several years real deposit interest rates were often higher than
20% and, in the most critical moments, even reached figures above the 40% level. The
financial and macroeconomic imbalances produced by those towering rates undermined
Brazilian stability, leading to the currency crisis that occur after 1998 which is on January
1999.
Recently: Brazil have financial system which rivals that of most developed
countries. Where others may have chosen to either anchor the price levels by returning to a
fixed or administered exchange rate regime or to try and control a monetary aggregate,
such as money held by the public or credit in the economy; Brazil has opted to use interest
rates as an instrument to control inflation.

Conclusion: As a conclusion, for Malaysia, a key precondition for monetary policy to
remain effective, in any exchange rate regime, is establishing a track record of credibility. In
Malaysia, this credibility is being achieved by adopting a holistic approach to policy
formulation. Rather than overburdening one policy tool, policymakers have used a
combination of several instruments for more effective results. For Brazil the very high
interest rates in Brazil up to its currency crisis were due to theoverreaction of monetary
policy to external shocks. This vulnerability was demonstrated in the sharp response to the
contagion from crises elsewhere, as well as to movements in the country risk premium. This
overreaction was associated with the presence of a large currency risk premium towards the
end of the soft peg regime. Malaysia has more advantage compare to Brazil.
2.0 The behaviour of the banking system and financial intermediaries including the fragility
of the banking system, evidence on the growth rate of lending, the external borrowing
behaviour of the banks and the amount of non-performing loans.
Malaysia
Before 1997: Loan growth in banking sectors broad property sector averaged about 44% per
annum compared to about 22% in the manufacturing sector. loan growth for the purchase of
shares and for consumption credits in the total banking system averaged about 11.5% and
13% respectively in the same period property sector was lending to the broad property sector
was a more lucrative business than lending to the manufacturing sector.
After 1998: Only in Malaysia, total asset affects significantly negative to debt ratio and bank
borrowing ratio Banking sector has preserved the distance from the manufacturing sectors in
FDI led industrialization. No significant difference on the foreign firms from the average.
Financial intermediation to foreign firms has been deepened in the process of reorganization
of the financial sector in the last decade

Recently: On the demand side, this was due to slower growth of public consumption and net
exports. The former grew just 5.9 per cent year-on-year, considerably down from the levels
achieved in the last two quarters of 2011 (4Q11: 22.9%; 3Q: 21.1%). The latter, against a
backdrop of poor external demand due to slow global economic growth, fell 20.8 per cent
year-on-year. Latest data for June meanwhile show that the annual import growth of 6.3 per
cent in China, a major destination for Malaysian exports, is just half of the 12.7 per cent
achieved in May. .
Brazil
Before 1997: The Real Plan was conceived on the same basis as the stabilization programs
with exchange anchor implement edin Latin America since the late 1980s, using a fixed or
semi-fixed rate of exchange in combination with more open trade policy as a price anchor. It
differed from Argentinas Convertibility Plan by adopting a more flexible exchang eanchor;
that is, a typical currency board system, rather than pegging the domestic currency at one-to-
one parity with the U.S. dollar. At the launch of the Brazilian program, in July 1994, the
government's commitment was to maintain exchange rate ceiling of one-to-one parity with
the dollar. Moreover, the relationship between changes in monetary base and foreign reserve
movements was not explicitly stated, allowing some discretionary leeway. After the effects of
the Mexican crisis, the exchange rate policy was reviewed and in a context of a crawling
exchange rate
After 1998: Brazilian economy has been marked by a stop-go trend. High banking spreads
and low credit-to-GDP ratios have contributed to economic growth below the economys
potential. The switch from an exchange anchor regime to a floating exchange regiment
January 1999, which marked the end of the Real Plan, was expected to reduce external
vulnerability and bring down interest rates, thus enabling the economy to overcome
macroeconomic constraints and move towards more sustainable growth. Such, however, has
not been the case, since there are still some severe macroeconomic constraints hindering
economic recovery.
Recently: The focus on financial sector reform in emerging market economies often centers
on the need to reduce government involvement in markets. Individual countries have taken
many different approaches toward reaching this goal. In Brazil, financial sector reform has
entailed the need for a large governmental role in structuring reforms, especially in the
banking sector.
Conclusion: As a conclusion compare Malaysia and brazil because Malaysia has consistence
economy than brazil that why Malaysia can solve the asia crisis with easy. Furthermore,
This vulnerability was demonstrated in the sharp response to the contagion from crises
elsewhere, as well as to movements in the country risk premium.This overreaction was
associated with the presence of a large currency risk premium towards the end of the soft peg
regime. Malaysia has more advantage compare to Brazil.






2.1 The financial conditions of the corporate sector including evidence of excessive
borrowing and leverage (all in this) over investment in the wrong sectors and projects, low
profitability of investment.
MALAYSIA:
Bank Bumiputra was incorporated in 1965 and was supposed to provide credit and financial
facilities to the rural areas in Malaysia. As a government-owned bank it is the preferred bank
for deposits of state funds and it grew rapidly and became the largest bank in SE Asia.
However, usually UMNO politicians or UMNO-linked civil servants were appointed to run
the bank instead of independent professional managers.
It is not surprising that it became a source of cheap funds and questionable loans for well-
connected businesses. This includes a RM200 million loan to UMNO in 1983 to build its
headquarters.
In July of 1983, what was then the biggest banking scandal in world history erupted in Hong
Kong, when it was discovered that Bumiputra Malaysia Finance (BMF), a unit of Bank
Bumiputra Malaysia Bhd, had lost as much as US$1 billion which had been siphoned off by
prominent public figures into private bank accounts. The story involved murder, suicide and
the involvement of officials at the very top of the Malaysian government. Ultimately it
involved a bailout by the Malaysian government amounting to hundreds of millions of
dollars.
That was just the first Bank Bumi scandal. The government-owned bank had to be rescued
twice more with additional losses of nearly US$600 million in todays dollars. Ultimately
government officials gave up and the bank was absorbed into CIMB Group, currently headed
by Nazir Razak, the prime ministers brother.
(ref. Grand Theft Malaysia, Asia Sentinel)


Based on the wrong investment that was made in Bumiputera Bank in 1965 its becoming in
evidence that Malaysia is not making a sound investment:
1) the banking system was being leaded by political person, not by professionals
2) the investment was not made based on professional evaluation and the way they solve the
problems by using another corporate body to bail out the deficit that they have which the
money can be used to generate other income for the economy if Malaysia.
This also has resulted to the bank excessive borrowing from another corporate body, but
making really low profit from its investment.
Brazil:
The sweetheart of many international investment portfolios in recent years, the Brazilian
economy had been enjoying a spectacular boom. Fortunes were made on the mushrooming
property market. Consumption had soared, with Brazils new middle class maxing out their
credit cards at malls just because they could. Business was going swimmingly for Brazil
until it started to flounder in the second half of last year. As the euro zone crisis deepened,
Brazils economy stumbled. It had cruised along at a 7.5 percent growth rate in 2010. By the
end of last year, some analysts revised growth predictions in 2012 to 3 percent, paltry by
recent Brazilian standards.
The truth was even worse than it might have seemed, according to data released in February
by IBGE, Brazils official statistics bureau. Gross domestic product (GDP) in 2011 grew by
just 2.7 percent the second-slowest pace since 2003 and Brazil skidded dangerously
close to a recession. Brazils economic growth slowdown was largely cyclical in nature, and
coming off the back of such strong growth in 2010, it is not particularly surprising.
Brazils boom was built on the twin engines of commodities and consumption.
Brazil exports minerals (such as tantalum, used in cell phones) and raw materials (such as
coffee and sugar) to countries including China. Abroad, factories turn these exports into
finished products, to be sold on to consumers in Europe, the US and the rest of the world.
When North America sputtered and the euro zone crisis took a turn for the worse mid-way
through last year, shoppers worldwide started tightening their belts. Back on the supply end,
demand for Brazils exports began to dry up, causing industry to slump. More significantly,
around the same time Brazilians began to feel the effects of interest rate hikes, put into effect
in the first half of last year. Making credit more expensive had been a deliberate, slow-burn
attempt to cool inflation by reducing private spending.
With Brazilians already nervous about the global uncertainty, the governments plan worked.
Consumption which had been the primary engine of growth in recent years stalled.
Starting in October last year, the Brazilian Central Bank responded to the slowdown by
lowering its basic interest rate, to make credit cheaper and ramp up private spending again.
Target interest rates were slashed from highs of 12.5 percent through August last year, to just
9.75 percent as of last week.
The bank is also trying to stimulate lending through so-called macro prudential measures:
The Finance Ministry has also reduced taxes in certain sectors, and plans to spend less on
wages and more on investment a mix it hopes will be more pro-growth and less
inflationary.
Now the government and economists are more upbeat about Brazils 2012 growth prospects
than they were late last year. BMI forecasts real 2012 GDP growth of 3.9 percent, and the
government is shooting for closer to 5 percent. However, many analysts reckon Brazil will
only see the benefits of its latest stimulus measures in the second half of the year.
Brazilian consumers are some of the most highly leveraged in the world, and that by
increasing the propensity to consume rather than save, the authorities are incentivizing
households to take on even more debt.
Although Brazils currency, the real, has dropped in value compared to its peak of around
1.55 in July last year, it has remained comparatively strong at 1.82 to the US dollar. Thats
causing Brazils export competitiveness to suffer and making life hard for manufacturers.In
short, he says, Brazil is consuming a lot more than it is producing, and at some point this
has to end or at least slow down although how and when this will play out is hard to
call.
ref: http://www.voxxi.com/the-brazilian-economy-what-went-wrong-
americas/#ixzz25Syp9PHT

Based on the information given above, it is clear that Brazil is having financial issue in its
economic due to its downturn in supplying goods. While North America demanding lesser
goods from Brazil, its has resulted Brazil earning lesser profit in its investments. Making
Brazil currency dropped its value and resulted in Brazil economic slowdown.


2.1 Political factors of Malaysia
In 1997-98economic crisis was portrayed as a personal victory because Mahathirs policy of
economic control, imposed in September 1998, protected Malaysia from the whims of outside
investors. By bringing an end to capital flight, capital control allowed the government to
lower interest rates and pump cash into the economy. And the governments attempt to
encourages financial to continue lending to companies, many of them politically connected,
has been a success in the short term.
Before 1997: The thailand crisis, analysts were speaking approvingly of a soft-landing, as
the economy to gradually slow in comparison with the torrid pace of 1995 and 1996.
Following the attacks on the Thai bath in may, central bank briefly defended the ringgit but
quickly gave up the effort. For the remainder of the year, the ringgit continued steady, and
largely uninterrupted fall.
After 1998Malaysias recovery in 1999-2000 was among the strongest of the Asian crisis
economics, led by buoyant world demand for electronic and supported by accommodating
macroeconomic policies. The external current account turned into large surpluses, allowing a
build up of international reserved. Unemployment declined, and inflation remain low. The
strong growth and a gradual easing of capital control helped investor confidence. The
recovery was also accompanied by reduced vulnerability of the financial system. Although
operational restructuring of the corporate sector has been somewhat slow, much progress was
achieved with corporate debt restructuring.









Political factors of Brazil
After 1997 based on forward In the bond market, Favero and Giavazzi offer evidence for the
role of political factors in explaining Brazilian interest rates. They note that the upward shift
in the term structure of forward rates that occurred between February 2002 and may 2002
could be linked to electoral uncertainty, and that forward-looking data as of mid 2002
indicated another upward shift in spring 2003,when the new government was to take office
after the election.
Before 1998 Brazil signed up to the "consensus" later than most, though there was a botched
attempt in 1990 by President Collor to halt inflation by freezing bank accounts. Collor, who
was later forced out of office on corruption charges, also scaled down the tariffs surrounding
the economy and attempted to cut public spending. In 1994, Fernando Henrique Cardoso, the
Brazilian Social Democratic Party (PSDB) economy minister in the next administration,
introduced the Plano Real, with full backing from the international financial world. It stopped
hyper-inflation by anchoring the currency to the dollar and by keeping interest rates high and
the exchange rate overvalued. The "inflation tax" was lifted from the shoulders of lower-
income families, generating a one-off but significant increase in living standards and a
consumer boom. This success ensured Cardoso's election to the Presidency in October 1994,
in alliance with the conservative Liberal Front Party (PFL).
Recently, The Brazilian Federation is the "indissoluble union" of three distinct political
entities: the States, the Municipalities and the Federal District.
[14]
The Union, the states and
the Federal District, and the municipalities, are the "spheres of government." The Federation
is set on five fundamental principles:
[14]
sovereignty, citizenship, dignity of human beings,
the social values of labour and freedom of enterprise, and political pluralism. The classic
tripartite branches of government (executive, legislative, and judicial under the checks and
balances system), is formally established by the Constitution. The executive and legislative
are organized independently in all three spheres of government, while the judiciary is
organized only at the federal and state/Federal District spheres.

Conclusion: As a conclusion Malaysia has a advantage then brazil because Malaysia crisis
not so bad than brazil. . For Brazil the very high interest rates in Brazil up to its currency
crisis were due to theoverreaction of monetary policy to external shocks. . This vulnerability
was demonstrated in the sharp response to the contagion from crises elsewhere, as well as to
movements in the country risk premium.This overreaction was associated with the presence
of a large currency risk premium towards the end of the soft peg regime. Malaysia has more
advantage compare to Brazil.





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