Tunku Abdul Rahman College

STRATEGIC FINANCIAL
MANAGEMENT
ABMF5355

Name: Juliana Tan Lee Ling

I.D: 08 WBA 12516

Course: 2AMA2

Marks Part A Part B Remarks

Introduction 20

Content 50

Conclusion 30

Total 100

GRAND
TOTAL

PART A

Introduction
 The world economy is moving into a recession which is expected to be the worst for
many years. Global financial crisis occur between the years 2007–2009 has contributed to the
failure of major businesses that leads to the downfall of consumers’ wealth, significant financial
commitments imposed by the government and also a great decline in economic activity1. Many
causes have been anticipated with different assumption carried out by financial experts. There
are also many solutions have been implemented or are being considerate while major financial
and other relevant risks still remains.

The trigger that causes the crisis started between the years of 2005-2006 which is the
collapse of the global housing bubble2, peaked in the US in the year of 2006 has caused the
values of securities that is tied to housing prices to plunge after that. This further leads to the
damaging financial institutions globally in regards of banks bankruptcy, limited in credit
availability and resulted a loss of investors’ confidence creating a diverse impact on global stock
markets which suffered huge losses during 2008. Economies worldwide have slowed down in
late 2008 and early 2009 as credit tightened and international trade declined due to the global
financial crisis3. There’s argument stating that credit rating agencies and investors failed to
measure the risk involved with mortgage-related financial products and that governments and
trade union did not set legislations to suit up with the 21st century financial markets.

The root that causes the collapse of the global housing bubble started in the US, mainly
due to the high default rates on adjustable rate mortgages (ARM), such as an increase in loan
incentives like easy initial terms and a long-term trend of rising housing prices4 had attracted
mortgage loan borrowers great offers with the belief they would be able to quickly refinance
their borrowings at more favorable terms. However, once interest rates began to rise and housing
prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became
tougher. Defaults and foreclosure activity increased dramatically as easy initial terms expired,
home prices failed to go up as anticipated, and ARM interest rates reset higher.5
1
www.freeencyclopedia.com/financialcrisis

2
http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm

3
http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm

4
www.freeencyclopedia.com/financialcrisis

5
http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm
 Heading to the starting point of the crisis in 2007, large amounts of foreign money
streamed into the U.S. from fast developing countries in Asia as well as oil-producing countries.
Various types of loans were easily obtained and consumers starting to accumulate large amount
of debts. As part of the housing and credit suddenly increases, the amount of financial
agreements which obtained their value from mortgage payments and housing prices greatly
increased. However, as housing prices declined, major global banking institutions are reported to
face significant losses.6

The continuation of the issue that began in late 2006 in the U.S. continues to exhaust the
wealth of consumers and weaken the strengths of financial institutions. Losses on other loan
types are also greatly affected when the crisis expanded from the housing market to other parts of
the economy. "The US economy has been spending too much and borrowing too much for years
and the rest of the world depended on the U.S. consumer as a source of global demand.”

Therefore, the downturn of US economy has affected the world economy thereafter.
Thus, global recession is clearly seen during the year of 2008 and total losses are estimated in
trillions of U.S. dollars globally in global financial crisis.

Impact of the global financial crisis on Malaysian market and Government Policies

For Malaysia, like other countries in the world has already felt the impact of the global
financial meltdown as Malaysia’s key sectors show signs of slowdown. The Malaysian economy

6
Closely referred to http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm
has been resilient in the first-half of 2008 but is increasingly being affected by the global
downturn.

The global equities markets are closely connected to each other therefore when the global
financial crisis hit fall in Asian equities markets are even more severe than in the U.S. Equity
markets decline and Malaysia is affected with a drop of 27% in the capital market7. The global
meltdown in equity markets leads to a major decline in Bursa Malaysia which had negatively
affected investors and consumers.

This is because foreign equity funds in the whole of Asia are withdrew to cover the losses
that are faced by US. As the US is the biggest importing country around the world which absorbs
25% of total world exports, thus when the global financial crisis hits, Malaysia traded with the
US which cast a 19% of the US imports also being affected. Exports declined in line with
deteriorating world demand.

However as a diversified economy and export market, the global financial crisis leaves
very little impact on the Malaysian economy when the US economy structure starts tumbling.
Malaysian economy is still strongly grow can be evidenced by resulting in the Gross Domestic
Product (GDP) achieving a growth of 7.1%. Although the drop in exports mainly are from
manufacturing goods (78% out of total exports), it is then compensated with the increase in other
manufacturing sectors like petroleum products, optical and scientific equipment. Even though the
domestic development will be affected after the collapse of housing bubble, Malaysia’s economy
will remain stable with a GDP growth.

In response to the crisis, the Malaysian government has already announced several
measures of economic stabilization plan such as firstly for bank deposits are guaranteed by the
central bank of Malaysia until the end of 2010 and the government has injected RM5 billion into
a special- purpose fund to support the stock market. The government also introduced a RM7
billion economy stimulus package to restructure the economy and overcome the global financial
8
crisis. These economy stimulus packages in Malaysia are in the form of housing benefits,

7
Dr Lim Mah Hui, Global Economic Trends
8
I&T Penang Properties Blogs
entrepreneurial credit facilities, and reduction in compulsory deposit options. National
government has allocated an economic stimulus package of Malaysia, which is worth MYR 1.2
billion for construction of 25,000 homes for low and medium income groups.9

The economic stimulus packages in Malaysia are to encourage further development of

infrastructure of the country by reducing import duties on iron and steel products and cement.
Alongside with a reduction in import duties, the government offered benefits for construction
sector industries to be set up. This is an opportunity for encouraging healthy competition in the
construction market and its benefit would be enjoyed by consumers.

A second Malaysia economic stimulus package is introduced and would be focusing on

issues such as deregulation, simplification of procedures and doing away with red tapes 10. Part of
this Malaysia economic stimulus package also deals with a movement that encourage Malaysia
moving towards to becoming a free market system.

Financial Crisis affecting the Malaysian Agriculture industry

When the US economy plummets, it affects the economy all over the world including
Malaysia’s agriculture industry. Being a top exporter of oil palms, rubber and other agricultural
outputs, there are areas that are strongly affected this industry. In term of the pricing factor, an
inflation of prices all over the world occurred. Being also one of the main exporters of these
agricultural products, lesser exports are on demand leaving a profitability scar on Malaysia that
eventually leads to product dumping. One of the examples that is faced by Malaysia in the
agriculture industry is that the price of the palm oil fall significantly due to the decreasing
demand worldwide for palm oil caused by the global financial crisis.

Malaysian government then proposes solutions in the economic stimulus package to

protect this sector by optimizing the usage of resources and increase agriculture contribution to
national GDP. The government also implements several agricultural programs to curb the issue
faced by this sector. For this crisis program, a sum of RM5.6 billion is provided under the

9
www.malaysianeconomicblog.com
10
www.malaysianeconomicblog.com
National Food Security Policy for the period 2008 to 201011. This allocation is to provide
incentives to agriculture entrepreneurs and investors to reduce production costs and encourage
higher quality agriculture output. Agricultural farmers, vegetable growers and aquatic breeders
all will benefit from these incentives. By further helping the farmers, the Government proposes
that import duty on farming tools such as pesticides and fertilizers be eradicated.

In the National Agriculture Policy, the government also invested on a further

development of agro-food sub-sector as well as agro-based industries with the declaration to its
objectives of enhancing food security; increasing the productivity and competitiveness of the
sector, deepen linkages with other sectors to create new sources of growth. This is done with the
aim of strengthening marketing and global networking as well as enhancing incomes of
smallholders, farmers and fishermen.

Taken together, the Malaysian government is doing their best to relook at the role of
agriculture in economic development, reassess and build on their relative strengths and their
gifted nature to help Malaysia through times of turbulent.

Financial Crisis affecting the Malaysian Automobile industry

The Malaysian automobile industry is a key sector in the Malaysian economy and link
heavily to the manufacturing and services sectors. This sector started off by importing vehicles,
which is then progressed to assembly operations and the founding of a wide network of
automobile components and parts manufacturers.

Despite the global financial crisis, the performance of the Malaysian automobile industry
was encouraging where the total industry volume of new vehicles registered in Malaysia for
2008 exceeded the MAA forecast of 510,000 units and attained the second highest in the
Malaysian automotive industry history12.

11
www.malaysianews.com/agricultureoverview
12
www.informaworld.com/.../content~content=a910186312~db=all~jumptype=rss
 The Malaysian automobile industry expected that the Malaysian motor vehicles sub-
sectors will also not be significantly impacted by the current global economic slowdown as the
local automotive industry is secured in the domestic market. Both Proton and Perodua, the two
main national car companies, have insignificant exposure to global markets, at the same time as
domestic demand is only marginally affected with about 7.5% contraction from last year13.
However, the industry is foreseeing a lower total industry volume for 2009 in relation to the
slowing down of our economic growth. The government would continue to support the industry
and to undertake measures which would contribute towards enhancing the business environment
in the country.

In order to alleviate the adverse effects from the global economic slowdown, the Second
Stimulus Package provides an additional fund of RM200 million injections to the Automotive
Development Fund to assist and promote the development of the industry that includes the parts
and components sectors. It is with the hope that this industry will continue in the development
and production plans, productivity improvements, to increase working capital In addition, to
boost sales of motor vehicles; the government has also allocated funds to support the scheme of
scrapping old cars. A government policy is to provide a deduction of RM5,000 will given to car
owner who scraps his car of at least 10 years old to purchase local cars like Proton cars from
EON company. This is to develop and strengthen the local automotive industry14.

The Third Stimulus Package given by the government is to impose 100% import duty and
50% excise duty on new hybrid CBU cars, with engine capacity below 2,000 cc to be given to
franchise importers. This exemption is given for a period of two years to prepare for the local
assembly of such cars.15 This will encourage more of the automobile and its components
manufacturing businesses to be set up and stimulate the industry growth. Malaysian companies
like Tan Chong Motor Holdings Berhad and Ingress Corporation Berhad selling and distributing
foreign cars need to lower their profit margin to attract customers to purchase vehicle from their
company. In order for them to sustain in their financing, they have to make more borrowings
from banks for many years.
13
kereta.info/global-crisis-will-impact-automotive-industry-this-year/
14
www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms
15
www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms
 While the Bank Negara Malaysia, the central bank, has reduced the overnight policy rate
(OPR) and the statutory reserve requirement (SRR) in the first quarter of 200916, this was
annulled by the increase in the hire-purchase interest rates for non-national cars by commercial
banks in April 2009.These rates were increased by about one percentage point to 3.25% for loan
tenures of five years and below, 3.4% for six to seven years and 3.5% for eight to nine-year
loans.17 Furthermore, banks are getting more cautious and strict in providing hire-purchase loans,
leading car buyers to face difficulties in financing their purchase. As a result, the production and
sales of non-national vehicles and automobile component parts and accessories were affected by
these factors.

Financial Crisis affecting the Malaysian Housing Development industry

The impact of the collapse of the housing bubble in US on Malaysia property market is
said to be protected because the Malaysian banking industry is not exposed to the sub-prime
lending crisis. Nevertheless, Malaysian economy will be affected in terms of reductions in
exports, new investments, closing down of factories as well as increasing unemployment. This
will affect the business and consumers’ confidence which will in turn influence the decisions and
response of the players in the property market and finally the demand for properties will reduce.

Property developers needed the building materials at the stage of construction is force to
absorb higher costs or face incomplete work. However, the prices of building materials have not
reduced since the subsequent drop in petrol prices. The property market in Malaysia will no
longer be booming and will probably stay stagnant. However, the prices might not go down
during the weak economy. This is the case because Malaysia is among the countries that are on
the recommended buy list of global property advisors. Foreign investors think the property here
is still cheap as compared to other countries in the region18. On the other hand, sales of the
properties will still be affected and prices reaching sky high as the global financial crisis affected
the investors’ confidence thus leading to the loss of major property development project being
delayed and slow down of the industry.
16
www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms
17
www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms
18
blog.intproperties.com/.../malaysia-property-selling-guide/
 Since the banks are stricter and control more of loan approvals, the government
intervened by lessening of regulations for larger withdrawals of EPF for house purchases also
with the help of Economic stimulus package, Malaysian government has set aside an amount of
RM 7 billion that has been saved from fuel subsidy and would be directed for housing
development19.

Financial Crisis affecting the Malaysian Tourism industry

The global financial crisis is to be blamed for recession of the world’s tourism industry.
However, the World Tourism Organization, which had reported a 1.9 percent increase in
international visitor arrivals in 2008 and forecast a more than four percent contraction in 2009 20.
Malaysia government has proposed a stronger cash injection from the Government to stimulate
local tourism businesses.

Malaysian tourism experts provided guidance and advise to local tourism agencies to
boost the numbers of tourist into the country by including extensive use of technology such as
the Internet, create more value-added services, consider brand extension in promotions, focus on
niche products such as youth travel, music and sports, volunteer tourism, eco-tourism and
gastronomic tourism, strategic alliances, using icons as a marketing strategy and celebrity
endorsement.

In Malaysia, the banks provide a special loan known as “soft loan” for tourism projects
with the preferential rates with lesser conditions and lower interest rate loans21. Malaysia's
tourism industry is also expected to further gain from the Government's coordinated approach to
maintain the competitiveness of the industry by developing attractive tourism products to
stimulate domestic and international demands. The Government has been focusing on efforts to
broaden Malaysia's tourism base by promoting Malaysia as a choice tourism destination in non-
conventional markets such as the Middle East to adjust to the affect of the global financial crisis.
19
http://forum.jobstreet.com/index.php?showtopic=290

20
http://ww2.publicbank.com.my/cnt_review46.html

21
http://ww2.publicbank.com.my/cnt_review46.html
 To attract more tourists into Malaysia, efforts will be taken to encourage more airlines to
operate from Malaysia. For this, a rebate of 50% on landing charges will be given for a period of
2 years effective 1 April 2009 to all airlines that operate from Malaysia22. Apart from that, the
Government will allocate RM200 million to upgrade infrastructure in tourist spots, diversify
tourism products, organize more international conferences and exhibitions in Malaysia as well as
improve the home stay programme. Apart from this, the Government will strengthen the
Malaysia My Second Home Programme and consider issuing work permits to skilled spouses 22
of the programme participants.23

Conclusion

It has been seen that the United States experience one of the worst economic crisis in two
decades, disasters in its subprime market leading to housing foreclosures and the complete
crumbling of the banking and financial system and lead to the global financial crisis which also
affects Asian markets including Malaysia. RM33 billion has been wiped out of the Malaysian
stock market24. The world is one global market therefore all the countries will not be excluded
from the negative impacts.

Financial crisis is far from over. It will spill over into real economy as the U.S. economy
is going into stagflation while Asian economy slowdown but still maintains positive growth.
Financial markets are still highly volatile in Asia and Malaysia.

There are many lessons that can be learned from Malaysia’s experience with the financial
crisis. It is clear that, besides the impact of the crisis on the economy, the various government
policy responses also have an equally significant effect on the economy. The crisis has shown
that rapid and high economic growth is largely not sustainable in the long run. Above all, the
crisis has shown that a measure of consistency in policy-making must always be maintained
22
. =http://forum.jobstreet.com/index.php?showtopic=290
23
. =http://forum.jobstreet.com/index.php?showtopic=290
24
Talk on “The Global Financial Crisis and Implications on Malaysia”, Universiti Malaya,
Kuala Lumpur, Faculty of Business & Accountancy
otherwise investors will always have a negative perception towards Malaysia because of policy
concerns and uncertainties.

With the bitter and painful experience of the global financial crisis, Malaysian as an
affected country have had to challenge the external constraint imposed by global capital mobility
is trying to make adjustment to the crisis and to rebuild the slow growing economy.