UNIVERSITI KUALA LUMPUR BUSINESS SCHOOL

BACHELOR BUSINESS ADMINISTRATION (HONS) INTERNATIONAL BUSINESS

NAME OF COURSE : MONEY, BANGKING AND CAPITAL MARKETS EEB 30203

SEMESTER : SEPTEMBER 2016

ASSESSMENT : GROUP ASSIGNMENT

DUE DATE : 8th JANUARY 2017

Class Group : IB50

Prepared for : JULIZA MOHAMED

Prepared by :

NAME ID
Mohamad Saufi bin Mohd Najib 62215114395
Nur Izzati bt Hamir 62215114599
Khairun Nazirah bt Mulana@Maulana 62215114589
Siti mahfuzah bt Mohammad Nasir 62215114681

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TABLE OF CONTENTS

1.0 INTRODUCTION ........................................................................................................................... 2

2.0 CONTENTS .................................................................................................................................. 10
2.1 MONETARY POLICY ............................................................................................................. 10
2.2 FISCAL POLICY ..................................................................................................................... 17
3.0 CONCLUSION ............................................................................................................................. 27
4.0 REFERENCES............................................................................................................................. 30
5.0 APPENDIX ................................................................................................................................... 32

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1.0 INTRODUCTION

1.1 Economic Recession Definition

Economic recession is a period of general economic decline and is typically accompanied by

a drop in the stock market, an increase in unemployment, and a decline in the housing market.
Generally, a recession is less severe than a depression. The blame for a recession generally
falls on the federal leadership, often either the president himself, the head of the Federal
Reserve, or the entire administration.

A recession is when the economy declines significantly for at least six months. That means
there is a drop in the following five economic indicators such as real GDP, income,
employment, manufacturing, and retail sales. People often say a recession is when the GDP
growth rate is negative for two consecutive quarters or more but a recession can quietly begin
before the quarterly Gross Domestic Product reports are out. The National Bureau of
Economic Research (NBER) measures the other four factors that data comes out monthly.
When these economic indicators decline, so will Gross Domestic Product.

The first sign of a recession is when there are several quarters of slowing but still positive
growth. Often a quarter of negative growth will occur, followed by positive growth for several
quarters, and then another quarter of negative growth.

A fall-off in consumer demand is normally the culprit behind slowing growth. As sales drop off,
businesses stop expanding. Soon afterward they stop hiring new workers. By this time, the
recession is usually underway.

A recession is destructive. It creates wide-spread unemployment, sometimes as high as 10%.

That is when it affects most people. As the unemployment rate rises, consumer purchases fall
off even more. Businesses go bankrupt. In many recessions, people lose their homes when
they cannot afford the mortgage payments. Young people cannot get a good job after school.
That throws off their entire career. Even if the recession is short for nine months, its impact
can be long-lasting.

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1.2 Example of Economic Recession

The Great Recession is a good example of the most recent recession. There were four
consecutive quarters of negative GDP growth in the last two quarters of 2008 and the first two
quarters of 2009. The recession quietly started in the first quarter of 2008. The economy
contracted slightly, only 0.7%, rebounding in the second quarter to 0.6%. The economy lost
16,000 jobs in January 2008, the first time since 2003 another sign the recession was already
underway.

Unlike most recessions, demand for housing slowed down first. That is why most experts
thought it was just the end of the housing bubble, not the start of a new recession. There are
few facts regarding to this issue such as GDP slowed in the fourth quarter, businesses orders
declined .06% compared to the prior year, employment fell, and unemployment rose and
housing prices fell 10%.

The stock market crash and subsequent economic downturn in 2000 are the other examples.
That was not a recession according to the textbook, because GDP growth was negative in Q3
2000, Q1 2001, and Q3 2001, none of which were consecutive. However, anyone who lived
through it knows that it felt like a recession during all that time and in fact, GDP growth did not
reach over 3% until Q3 2003.

1.3 Recession versus Depression

A recession can become a depression if it lasts long enough. In a recession, the economy
contracts for two or more quarters. A depression will last several years. In a recession,
unemployment can rise to 10%. In a depression, the unemployment rate will be 25%.

A recession is widespread economic decline that last for at least six months. A depression is
a more severe decline that lasts for several years. For example, a recession usually last for
18 months, while the most recent depression lasted for a decade. There have been 33
recessions since 1854. There is only been one depression since then, The Great Depression
of 1929. It was actually a combination of the recession that lasted from August 1929 to March
1933, and the one from May 1937 to June 1938. If people are wondering if they are in a
depression or recession, it is probably a recession.

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1.4 Are There Any Benefits to a Recession?

The only good thing about a recession is that it cures inflation. The balancing act the Federal
Reserve must pursue is to slow the economy enough to prevent inflation without triggering a
recession. Usually, the Fed does this without the help of fiscal policy. Politicians, who control
the Federal budget, generally try to stimulate the economy as much as possible through
lowering taxes, spending on social programs and ignoring the budget deficit. That is how the
United States debt grew to $10.5 trillion before even a penny was spent on the Economic
Stimulus Package.

1.5 Causes of Economic Recession

Economic recessions are caused by a loss of business or consumer confidence. As

confidence recedes, so does demand. This is the tipping point in the business cycle where the
peak, often accompanied by irrational exuberance, moves into contraction. This loss of
confidence makes businesses and/or consumers stop buying and move into defensive mode.
Once a critical mass moves toward the exit sign, panic sets in and creates a destructive
downward spiral. In short order, people get mass layoffs and rising unemployment, which
create a slowdown in retail sales. Manufacturers cut back in reaction to falling orders, further
increasing layoffs. To restore confidence, the Federal government, and the central bank must
usually step in.

A decline in GDP growth is a sign that a recession may be underway, but it is rarely a cause.
That's because GDP is only reported on after the quarter is over. By the time GDP has turned
negative, the recession may already be underway. What people want to do is identify the
causes, and signs, before the recession occurs.

Asset bubbles are when the prices of internet companies, stocks or houses become inflated
beyond their sustainable value. The bubble itself sets the stage for a recession to occur when
it bursts.

Deflation can be defined as encourages people to wait until prices are lower. This aggravated
the Great Depression.

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The most causes of recession are:

i. High-interest rates. When rates rise, they limit liquidity, or the amount of money
available to invest. The biggest culprit was the Federal Reserve, which often raised
interest rates to protect the value of the dollar. The Fed raised rates to battle stagflation,
causing the 1980 recession. It did the same thing to protect the dollar/gold relationship,
worsening the Great Depression.
ii. A stock market crash. The sudden loss of confidence in investing can create a
subsequent bear market, draining capital out of businesses. Here is how a stock
market crash can cause a recession.
iii. Falling housing prices and sales. As homeowners lose equity, it forces a cutback in
spending as they can no longer take out second mortgages. Over time, it will cause
foreclosures. This was the initial trigger that set off the Great Recession, but for
different reasons. Banks that lost money on the complicated derivatives based on
underlying home values.
iv. A slowdown in manufacturing orders. Orders for durable goods started falling in
October 2006, before the 2008 recession actually hit.
v. Massive swindles. The 1990 recession was caused by the Savings and Loans Crisis.
More than 1,000 banks (total assets of $500 billion) failed as a result of land flips,
questionable loans, and illegal activities.
vi. Deregulation. The seeds of the S&L crisis were planted in 1982 when the Garn-St.
Germaine Depository Institutions Act was passed. This removed restrictions on loan-
to-value ratios for these banks.
vii. Wage-price controls. Fortunately, this only happened once, when President Nixon kept
prices too high, cutting demand. Employers laid off workers because they were not
allowed to lower wages.

1.6 Factors that Cause Recessions

There are several factors that cause the recessions such as the first factor is high interest
rates are a cause of recession because they limit liquidity or the amount of money available
to invest and second factor is increased inflation refers to a general rise in the prices of goods
and services over a period of time, as inflation increases, the percentage of goods and
services that can be purchased with the same amount of money decreases.

Reduced consumer confidence is another factor that can cause a recession. If consumers
believe the economy is bad, they are less likely to spend money. Consumer confidence is
psychological but can have a real impact on any economy.

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Reduced real wages is also another factor refers to wages that have been adjusted for
inflation. Falling real wages means that a worker's paycheck is not keeping up with inflation.
The worker might be making the same amount of money, but his purchasing power has been
reduced.

1.7 Recessions and Gross Domestic Product

An economic recession is typically defined as a decline in gross domestic product (GDP) for
two or more consecutive quarters. GDP is the market value of all goods and services produced
within a country in a given period of time. An example of one type of GDP would be the value
of all the automobiles produced within the United States for one year. GDP only takes into
account new products that have been manufactured. Therefore, if a pre-owned car lot were
selling pre-owned cars, they would not be included in the GDP calculation.

1.8 Causes of recessions

A recession implies a fall in real GDP. An official definition of a recession is a period of negative
economic growth for two consecutive quarters. Recessions are primarily caused by a fall in
aggregate demand. This demand side shock could be due to several factors, such as financial
crisis, rise in interest rates or fall in asset prices for example the houses.

1.8.1 First cause of recession is Demand Side Shock

Factors that can cause a fall in aggregate demand are higher interest rates which reduce
borrowing and investment, falling real wages, falling consumer confidence, credit crunch
which causes a decline in bank lending and therefore lower investment, a period of deflation
which falling prices often encourage people to delay spending. Also deflation increases the
real value of debt causing debtors to be worse off and appreciation in exchange rate which
makes exports expensive and reduces demand for exports.

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1.8.2 Second cause of recession is Supply Side Shock

Higher oil prices would increase the cost of production and causes the short run aggregate
supply curve to shift to the left.

This supply side shock causes lower real GDP and higher inflation. This is difficult to solve
with monetary policy because it has both inflation and lower output to try and solve which
changing interest rates cannot do both at once. Confidence can be defined as a fall in
confidence can precipitate a recession.

1.9 Economic Recession in Malaysia

Popular disaffection with the Mahathir Administration had been growing with the economic
recession. Together with rising unemployment and declining public expenditure, especially for
social services and subsidies, there was now more public awareness of the phenomenon of
"money politics" (the increasing political access to wealth acquisition) and of various major
scandals and corporate failures, as well as of the growing curbs on civil liberties and
democratic rights (such as the amendments to the Official Secrets Act in late 1986).

The global economic recession in the middle 1980s and the consequent financial constraints
experienced by government the world over brought about a more significant administrative
reform in Malaysia. Like many other governments worldwide, the Malaysian government took
a closer look at the functions of government with the view to reduce the burden of massive
public expenditure. Programmed and projects were reviewed and evaluated to ensure that
only those that were productive received continued funding. Subsidy programmers were cut
back significantly. A general austerity drive that included a freeze in the annual wage increase
of the civil service was introduced. Amazingly the entire civil service went through these events
without any major furor.

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With the end of the New Economic Policy in 1990, the National Development Policy was
created under the Second Outline Perspective Plan (1991-2000) with national unity remaining
the ultimate goal. Since the main objectives of the New Economic Policy, namely poverty
eradication and social restructuring, were not fully realized, they continue to form the major
thrust of the socio-economic programmers of the National Development Policy. The policy
also emphasizes other aspects of development, namely as the creation of a balance between
growth and equity, the reduction and eradication of social and economic inequalities that exist
in the country, the assurance of a balanced growth in all the main economic sectors, the
strengthening of national integration and reduction of regional disparities, the creation of a
community with positive social and spiritual values, the creation of a workforce that is
disciplined and productive and also the creation of a pool of skilled manpower for the industrial
sector, the application of science and technology as an important tool in the socio-economic
planning and development of the country and the protection of the environment and ecology,
which are taken into account in the planning process.

These aspects also characterize the main features of the Vision 2020 which outlines
Malaysia's desire to be a developed country by the year 2020. The 30 year plan (1991-2020)
enunciated by the Prime Minister strategizes the way Malaysia will become a fully developed
country; developed in terms of national unity and social cohesion, in terms of its economy,
social justice, political stability, system of government, quality of life, social and spiritual values,
national pride and confidence, i.e. developed along all dimensions that is socially, spiritually,
culturally, politically, psychologically and economically.

Beside the recession, the background to reforms had been the widely shared pessimism about
the capacity of governments and bureaucratic type institutions to clearly define and undertake
economic and industrial development programmers. The prevalent belief was that government
bureaucracies were inherently incompetent to perform this task through traditional public
enterprises and state corporations. The government rationalized its role and functions and
privatization was subscribed as the major strategy in downsizing the government and reducing
its active involvement in the economy.

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From heavy reliance on agriculture and primary commodities, Malaysia today is one of the
leading exporters of semiconductors and air conditioners in the world. Due to its small
domestic market, Malaysia needs to continue its dependence on export for its economic
survival. This has however subjected the economy to the vagaries of international market
conditions and other problems. Fluctuating commodity prices, growing protectionism,
deteriorating deficits in the balance of payments, deteriorating domestic savings are but some
of the problems that Malaysian bureaucrats have to grapple with. To cope with the above
difficulties and challenges, the management capability of the civil service needs to be
upgraded and reinforced.

The political leadership was instrumental in this reform process. Against the backdrop of
economic dampening due to the prolonged recession, a new direction was charted not only
for economic survival of the nation but also for the administrative "reason-d'etre" for change.
Also the political leaders took great efforts to minimize negative effects from those who
resisted these changes. Their commitment and vigorous campaigns, together with other
structural changes and the favorable movement in the economy, higher productivity and
efficiency for the country helped in the process. This has enabled the country to strengthen its
resilience and withstand the effects of persistent global recession. By any standard, Malaysia
continued to remain politically and economically a very stable nation. Overall, the Gross
Domestic Product grew at an average rate of 5.8 percent (in real terms) during the period
1981-1985. During the following five year period of 1986-1990, the economy experienced a
spectacular performance in which the GDP registered a growth rate of 6.7 percent annually.

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2.0 CONTENTS

2.1 MONETARY POLICY

2.1.1 Explanation

Monetary policy is defined as the attempt to control macroeconomic variables

through the setting of interest rates. It is a rather blunt policy tool as its effects
can be felt throughout the economy as a whole. The difference between
monetary policy and fiscal policy is, monetary is set by the central bank while
fiscal is implemented by the government. When the central bank decided to
change the interest rate, they are trying to influence the overall expenditure in
the economy as well as they wanted to control the inflation. If central bank
wanted to reducing interest rates it will makes borrowing the more attractive
alternative to saving which then leads to more spending in the economy.

Lowering interest rates can also make assets such as property increase
in value which also leads to more spending as homeowners extend mortgages
and consume more. By cutting interest rates, it is hoped that this increased
spending feeds through to output and then to employment. Increasing interest
rates on the other hand, has the opposite effect by making saving more
attractive than spending and therefore overall spending in the economy is
reduced.

In Malaysia, Bank Negara Malaysia (BNM) conduct monetary policy

based on 22 Central Bank of Malaysia Act 2009. They will conduct the
monetary policy by influencing the level of interest rates that borrowers have to
pay on their loans and depositors earn on their deposits. During the peak of
economic overheating and when the threat of inflation is high, monetary policy
will be tightened by withdrawing fund from the banking system and raising
interest rates. The higher interest rates will encourage people to save more and
spend less. It would also make it more expensive for people to borrow money.
This will cause consumption and investment to slow down to a level that is more
sustainable and reduce the prospect for high inflation. Conversely, when
economic conditions are weak, fund will be injected into the banking system to
reduce interest rates, spending and borrowing would increase. The resulting
increase in consumption and investment would stimulate further economic
activity, leading to higher income, employment and economic growth.

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 Monetary policy plays a big part in our economy, without it there would
be a lot of confusion in the business world. In particular, the main one would be
the banking system. The Federal Open Market Committee (FOMC) is the body
that is responsible for most of the monetary policy decisions that are made.
Monetary Policy has to do with recession and inflation which is very important
in our economy. Another important fact about monetary policy is aggregate
supply and demand. Monetary policy affects them deeply depending on the
economies input, output, and rate of inflation.

The monetary policy that is speedy and flexible and somewhat remote
from political pressure. It doesn't raise inflation value of money by weaken its
purchasing power. Whenever inflation advance faster than expected, they may
sell government bonds to take money out of circulation. This also can minimize
access to credit and slow consumer spending. The decisions they had made
really had an effective impact on our economy. Monetary policy has stable
prices which is keeping inflation low, it also quality business and households to
make financial decisions without worrying about sudden unexpected prices
increasing. The long term enable policy makers assess. The best policy tends
to seek between these short- and long- term goals. Lower interest rates to
expand the money supply and stem rising unemployment Rates during
recession. Although the weaknesses practicing monetary policy cause the
central bank to lose control of currency valuation, it wouldn't be possible for
interest rates. It also devalues the currency further more monetary policy can
achieve low inflation in the long run and affect economic output and
employment in the short run. When inflationary pressures decrease, the
unemployment rate may advance for a short period as the pace of the economy
slows. It also can take up to months or even a year maybe even longer to have
the effect.

Monetary have their pros and cons. Although monetary policy is not
very effective in a recession, it is flexible and works well to slow down the
economy. Many prefer fiscal over monetary because it brings low taxes and
low interest rates.

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2.1.2 Relation monetary policy with the economic recession

In the year of 1997 witnessed a new stress of financial crisis where by

the Asian financial crisis. What began as a localized currency crisis rapidly
turned into a financial and economic crisis. Beginning in mid-May 1997 with a
speculation attack on the Thai bhat, the Philippine peso and Indonesian rupiah
and the Singapore dollar came repeated attack of selling pressure. Then the
pressure on currencies quickly spread outside South-East Asia. The Korean
won, Hong Kong dollar and Taiwan dollar soon came under pressure as well.

By early 1998, it was clear that the pro-cyclical IMF macroeconomic

policies were not working. Dr. Mahathir, Prime Minister of Malaysia during that
time, changed direction, set up the National Economic Action Council and
centralised decision making and policies. In July 1998, he launched the
National Economic Recovery Plan, seen as an alternative to orthodox IMF
policies. The objectives of this were to stabilise the local currency, restore
market confidence, maintain financial market stability, restructure corporate
debt, recapitalize and restructure the banking sector and revitalize the
economy. These policies were implemented in stages. To counter the
recession, on the monetary and financial sector front Bank Negara loosened
monetary policy by reducing interest rates gradually from 11 percent in July
1998 to 6 percent in May 1999 and 3 percent in December 1999. The statutory
reserve requirement was also lowered, from 13.5 percent in July 1998 to 4
percent by October 1998. The nonperforming loan definition was changed back
to six-month arrears instead of three months. Bank Negara also set targets for
banks to increase their loans by 8 percent in 1999.

While the Malaysian economy was in a relatively strong position when

it entered the East Asian crisis, Malaysia still could not escape the economic
and financial implosion. As a result, Malaysian economy experienced its
deepest recession and the Gross Domestic Product (GDP) contracted by 7.5%
in 1998. According to Malaysian Economic Recovery Measures: A Response
to Crisis Management and for Long-term Economic Sustainability by MAHANI
Zainal-Abidin(2000) the economy was still buoyant in 1997 with GDP growth of
7.7% and the impact of the crisis only began to be felt in the first quarter of
1998 when the GDP declined by 3.1%. The severest contraction occurred in
the third quarter of 1998 when GDP fell by 10.9%.

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 Most of the Asian country received assistance from IMF, so they have
shown a similar result and growth by implemented tight fiscal and monetary
policies, floated the exchange rate and initiated reform and restructuring
measures. Malaysia decided not to receive a help by IMF but have taken a
different path has taken a slightly different path when introduced the selective
capital controls in September 1998. According to Bank Negara Malaysia, they
have introduce a few of monetary policy during 1998 to achieve their objective.

Firstly, maintain tight monetary policy. Despite a slowdown in growth,

it is essential to maintain a tight monetary policy to contain inflationary
pressures arising from the depreciation of ringgit. This policy is intended to
strengthen the foundation on which the prospect for sustainable growth in the
medium and longer term would be enhanced.

Secondly, the interest rate structure will be streamlined to reflect

liquidity conditions in the market. Arising from recent developments, the term
structure of interbank and lending rates is no longer reflective of prevailing
market conditions. The shorter end interbank rates tend to reflect the
exceptionally tight liquidity situation of a small number of banking institutions.
However, because of current uncertainties, there has been a tendency for
lending rates to be based on these short-term rates on a cost plus basis. The
measures being announced today aim at improving the flow of liquidity in the
system and, therefore, generate a more orderly term structure of interest rates
that would better reflect the liquidity in the financial system. For this purpose,
the 3-month Bank Negara intervention rate, currently at 10%, would under
present conditions, be adjusted upwards to 11%. Interest rates began to
decrease and restrictions on debt repayments eased. In this regard, the base
lending rates (BLR) was reduced from the highest 12.3% in June 1998 to 6.79%
in October 1999. Lending rates were consequently reduced from a high 24% in
February 1998 to 7.91% in October 1999. The lending spread was capped to
2.5% of the BLR.

Thirdly, to reduce the statutory reserve requirements (SRR) of

commercial banks, merchant banks and finance companies from the current
level of 13.5% to 10% of their eligible liabilities, effective 16 February 1998.
This is aimed to enhance the efficiency of the intermediation process and not
to provide additional liquidity to the system. The Bank will in effect neutralize
the additional liquidity to the banking system arising from the reduction in the

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SRR by reducing its direct interbank lending, thereby slowing down base
money growth. The reduction in SRR from 13.5% to 10% would release about
RM14 billions of funds to the banking institutions. However, the simultaneous
reduction in central bank lending to the interbank market would result in a
neutral impact on liquidity. Statutory reserves requirement (SRR) had been
gradually reduced from 13.5% in February 1998 to 8% in July, 6% in September
1, and 4% in September 16, 1998 to increase liquidity in the banking system.
With the reduction of the SRR, an additional US$10 billion has been injected
into the banking system that would help to increase business and economic
activities.

While for 2016, Bank Negara Malaysia has set a few strategies. BNM
said its monetary policy in 2016 would focus on ensuring that monetary
conditions remain supportive of sustainable domestic growth with price
stability, taking into consideration the evolving risks in the external and
domestic environments.

Monetary policy will also continue to take into account the risk of
financial imbalances. In addition, given the expectation of continued volatility in
external flows, BNMs monetary operations will be directed towards ensuring
that domestic liquidity in the financial system will remain sufficient to support
the orderly functioning of the domestic financial markets.

On 23 November 2016, at the Monetary Policy Committee (MPC)

meeting, Bank Negara Malaysia decided to maintain the Overnight Policy Rate
(OPR) at 3.00 percent. The global economy continued to grow at a moderate
pace. Economic activity in major advanced economies has improved but
remains moderate. In Asia, growth has been supported by domestic demand
amid persistent weakness in the external sector. Looking ahead, the baseline
estimate is for global growth to improve slightly in 2017. The prospect of a shift
towards progressive use of fiscal policy in the developed economies could lead
to a more balanced policy environment that would support growth going
forward. Nevertheless there is uncertainty arising from risks of protectionism
and financial market volatility.

Heightened financial market volatility in recent weeks has had an

adverse effect on various asset classes, exchange rates and yields across
many emerging economies. Global financial market conditions are likely to be
susceptible to policy and market developments.

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 The domestic economy continued to expand in the third quarter of the
year, driven mainly by private sector activity with some support from net
exports. Going forward, private sector activity will remain the key driver of
growth. Private consumption is expected to be sustained by continued wage
and employment growth, with additional support from Government measures
to increase disposable income. Investment activity, although moderating, will
be supported by on-going infrastructure investments and capital expenditure in
the manufacturing and services sectors. On the external front, exports are
expected to expand but will be constrained by soft demand from Malaysias key
trading partners. Overall, the domestic economy remains on track to expand
as projected in 2016 and 2017.

The ringgit, along with most emerging market currencies, has

experienced sharp adjustments and significant volatility due to continuing
uncertainties in global economic and policy environment, and geopolitical
developments. These factors could result in periods of volatility in the regional
financial and foreign exchange markets. In this regard, Bank Negara Malaysia
will continue to provide liquidity to ensure the orderly functioning of the
domestic foreign exchange market. The capital market remains accessible,
deep and liquid. Banking system liquidity is ample. Financial institutions
continue to operate with strong capital and liquidity buffers and the growth of
financing to the private sector is consistent with the pace of economic activity.

At the current level of the OPR, the degree of monetary

accommodativeness is consistent with the policy stance to ensure that the
domestic economy continues on a steady growth path amid stable inflation,
supported by continued healthy financial intermediation in the economy. The
risk of destabilizing financial imbalances has been contained. However, the
MPC will be monitoring these risks to ensure the sustainability of the overall
growth prospects.

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2.1.3 Analyze the action regarding Monetary Policy that Bank Negara had
done to minimize the impact of economic recession.

Bank Negara Malaysia left the overnight policy rate unchanged at 3 percent
and central bank cited firm growth prospects and stable inflation, but hinted it
may need to tighten monetary policy in the near future to curb financial
imbalances like rising household debt.

For Malaysia, exports will continue to benefit from the recovery in the
advanced economies and regional demand. Private sector spending is
expected to remain robust. Investment activity is supported by broad-based
capital spending, particularly in the manufacturing and services sectors. Private
consumption will be underpinned by stable income growth and favorable labor
market conditions. The prospects are therefore for the growth momentum to be
sustained.

Regarding to the interest rate, we can see that the monetary inflation
usually resulted in price inflation which raised the general level of prices of
goods and services which should be sustained. The originally of the term
inflation was used to refer only to monetary inflation which presently used
refers to price inflation. The implementation of monetary policy alone was not
satisfactory. Monetary policy will be effective when all policies which are fiscal
and monetary policy were implemented together. Consumption spending and
inflows of short term speculative capital had emerged as important influences
on the effectiveness of monetary policy. In conclusion, Malaysian recovery
measures were formulated after evaluating its domestic circumstances, with
the aim of reviving the economy without weakening its fundamentals. However,
the recovery process must be used to further restructure and improve the
economy to ensure that it can move to a higher level of development.

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2.2 FISCAL POLICY

2.2.1 Explanation

Fiscal policy is concerned with all those arrangements which are adopted by
the governments to collect the revenue and make the expenditures, so that the
economic stability could be attained which is the government decides how
much to spend, what to spend, what to spend for and how to finance its
spending. Fiscal policy usually involves changes in taxation and spending
policies. Lower taxes mean more disposable income for consumers and more
cash for businesses to invest in jobs and equipment. Stimulus-spending
programs, which are short-term in nature and often involve infrastructure
projects, can also help drive business demand by creating short-term jobs.
Increasing income or consumption taxes usually mean less disposable income,
which, over time, can decelerate business activity. The fiscal policy works when
the Government steps in and influences productivity levels. This is done by
increasing or decreasing the public spending and either increasing or
decreasing taxes. The process is supposed to help create more jobs and curb
inflation.

Malaysia follows an explicit fiscal policy rule that disallows an operating

deficit in any given year. This aims at making a credible commitment to long
term fiscal sustainability by applying discipline to annual budgets. As
mentioned before in this report, the implementation of Economic
Transformation Plan to move towards high income has proven to be vertically
taken off with most targets has been achieved and exceeded within the span
of more than 2 years. Based on the executive report by bank Negara Malaysia
(BNM), Malaysia is moving from a resource based economy into more service
centric economy as most of high-income nations globally.

Fiscal policy can be further explained as the use of government

spending and taxation to further influenced the economy. It is typically to
promote a sustainable growth of economy in the long run as well as stabilizing
the macroeconomic post crisis such as expanding spending, tax cutting to
further stimulate a recovering economy. In the longer term, the government can
foster a sustainable economy by improving infrastructures, providing better

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education and scholarship to boost the professional participation among the
public, encourage public participation in corporate as well as academic.

In the short term the fall in exports was offset by an unprecedented

fiscal stimulus programme launched over two rounds started in 2008. In the
total government's countercyclical measures amounted to an estimated RM67,
000,000,000, which were allocated to support private enterprise. The second
package which was announced on March 2009, set aside RM 5,000,000,000
to support firms that need access to working capital, with specific involvement
in tourism, aviation and auto industries. As such, Malaysia is sought to speed
up the implementation of existing infrastructure projects such as the extended
rail of Light Railway Transit (LRT), Mass Rapid Transit (MRT), targeting in
particular the expansion of high speed broadband network, and also airport
upgrades.

Although Malaysia has relatively low debt to GDP ratio of around 50%,
the global issue of sovereign debt with Greece in early 2010 is likely to put
pressure on Malaysia to introduce fiscal tightening measures to prevent
increased lending cost. The fiscal deficit target for 2010 has been revised to
5.3% taking into consideration RM12, 000,000,000 supplementary budget and
the revised 2010 GDP. The 2009 budget gap reached 7% of GDP, largely due
to fiscal stimulus plan. The level of government expenditure is forecasted to
decline faster with the government promising to introduce an efficiency drive
and reduce the subsidies on fuel, food and education. This measure would help
to reduce the structural and fiscal deficit, ensuring the government's
consolidation efforts have a permanent impact. The spending target set for
2010 is RM 201,700,000,000 in 2010 and the fiscal deficit is expected to decline
to 5.3%.

Basically there are 3 major types of fiscal policy rules. First is the
balanced-budget or deficit rules comprises of 3 balance between the overall
revenue and expenditure; or limit on government deficit as proportion of GDP.
Another one is balance between structural and expenditure, and balance
between current revenue and current expenditure. The second type of fiscal
policy rules is the borrowing rules which prohibits on government borrowing
from domestic sources as well as prohibits government borrowing from central
bank; or limit on such borrowing as a proportion of past government revenue
or expenditure. The third and last fiscal rule is debt or reserve rules which limits

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on stock of gross government liabilities as a proportion of GDP and target stock
of reserves of extra budgetary contingency funds (such as social security fund)
a proportion of annual benefit payments.

In achieving a strong commitment to fiscal sustainability as well as in

ensuring the sustainable long term growth, Malaysia is facing implementation
constraint; however there is need to adjust the existing procedure to result in
enhancing its efficiency. Flexibility can be incorporated into fiscal rules by
expanding the horizon for budget formulation including the application of fiscal
rules; to cover the course of a business cycle would provide the economy with
improved shock-absorptive capacity. For instance, the rule on the annual
operating budget for Malaysia could be modified from one year to allow an
operating deficit during an economic downturn while observing the balance
over the course of a business cycle. It often takes a while to implement the
spending measures, and may be in effect even longer than needed. This would
require a medium-term fiscal framework for planning and forecasting.

Besides that, the government can introduce contingency measures

during the budget process. It can be either to add stimulus or withdraw as it
required. This could include the elimination of a surtax and introduction of a
stabilization fund. Although a cut increase in capital spending is effective, but it
should be used only as a last resort. This can be triggered during budget
execution if actual budge performance deviates significantly from the planned
path. Similarly, the scope of stabilizers can be improvised by a more
progressive tax system. For instance, tax on high-income household at a higher
rate than off the lower income household. There are two types of taxes that can
be imposed which are levied to transfer fund from private to public use namely
direct taxes levied from income, profit and wealth as well as indirect taxes such
as excise duty, sales taxes, quit rent and so on.

Next, there are several objectives under fiscal policy which are to
achieve desirable price level, to achieve desirable employment level, to
achieve desirable income distribution and to increase in capital formation.
Fiscal policy is based on Keynesian theory which states that government can
influence macroeconomics productivity levels by increasing or decreasing tax
levels and public spending. Last but not least, there are two types of fiscal
policy which are contractionary policy and expansionary policy. Contractionary
policy is decreases in government spending and increases in taxes for the

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purpose to decrease aggregate demand to control inflation in case of boom in
economy. While expansionary policy is Increase in government spending of
goods and services and decreasing in taxes to increase aggregate demand in
case of recession.

2.2.2 Relation fiscal policy with the economic recession

Fiscal policy refers to the use of the government budget to influence

economic activity. Malaysian government's attempt to influence the economy
by setting and changing taxes, making transfer payments, and purchasing
goods and services in order to achieve macroeconomic objectives such as full
employment, sustained economic growth, and price level stability. The two
main instruments of fiscal policy use by Malaysian government are government
taxation (revenue collection) and expenditure (spending). There are three
possible stances of discretionary fiscal policy, namely neutral, expansionary
and contractionary. However, how the Malaysia government set fiscal policy.
The policy response is depend on the economic situation, either it occur a
recessionary gap, inflationary gap, budget deficit or surplus. For instances,
expansionary fiscal policy will be use during recessions, which is tax cuts and
increased government spending in order to increase demand and economics
growth while contractionary policy will be use during booms, which is increased
taxation and lower government spending to reduce demand and reduce
inflation.

Malaysia in recovery phase, fiscal policy is the main factor which result
the Malaysia's economic growth and into recovery phase. It is the government
expenditure and revenue collection to influence one nation's economy. It
includes expansionary and contractionary fiscal policy. Another main type of
economy policy which is monetary policy is stabilizing economy by controlling
interest rate and money of supply. How to apply the fiscal policy can have an
impact on the economy growth. It has effect of the budget outcome on
economic activity. Government use fiscal policy to stimulate the level of
aggregate demand of economy, to achieve price stability, full employment and
economy growth. It is mostly used in the period of recession.

Here are some examples of how the Malaysian government has set
fiscal policy. In a recession, the government may decide to increase borrowing
and spend more on infrastructure spending. The idea is that this increase in
government spending creates an injection of money into the economy and

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helps to create jobs. There may also be a multiplier effect, where the initial
injection into the economy causes a further round of higher spending. This
increase in aggregate demand can help the economy to get out of recession.

For example, in year 1997 and 1998, the Malaysian economy had faced
with a sharp global recession. Therefore, Malaysian government had set an
expansionary fiscal policy in year 1998 to overcome the recession. The fiscal
measures included a selective increase in infrastructure spending, introduction
of tax incentives to support private and domestic sector, such as tourism and
small and medium enterprises (SMEs), a higher allocation for social sector
development and a reduction in taxes. Government has increasing the
development expenditure of RM7 billion into agriculture, education and housing
area development and a RM 5 billion in the infrastructure projects. (Ministry of
Finance 2001, Bank Negara 2002).

In addition, government can also implement the tax cut policy in order
to overcome recession. Tax cut in service tax, sales tax, excise tax, export
duties, import duties, income tax or an increase in transfer payments, for
example, unemployment benefits or welfare payments will increase disposal
income, therefore increase the purchasing power of households. Reducing in
the corporation tax will also raise the ability in the investment. Hence,
aggregate demand will increase and this will close the recessionary gap
therefore increase economic growth and reduce unemployment.

Other than that, expansionary fiscal policy also helps to reduce budget
deficit. For example, in order to reduce the budget deficit in 2012, which is 4.7%
at GDP, a prudent fiscal policy was implemented by Malaysian government. It
is aim to promote domestic economic activity and providing support to the
economic transformation plan. In order to achieve the objectives of full
employment and sustained economic growth, government had emphasis on
the growth of private sector investment and consumption in the 2012 Budget.
Hence, these will increase the aggregate demand by increase the government
expenditure on goods and services on spy satellites, school, highways and the
list goes on.

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 Furthermore, as a part of the Government's efforts to increase
aggregate demand, a large amount of fund was allocated for various forms of
incentives and subsidies in order to support the private consumption. For
instance, some financial assistance programmes had been introduced such as
the cash assistance of RM500 to households with monthly income of less than
RM3, 000 as well as the SARA 1Malaysia scheme, RM100 schooling subsidy
to all primary and secondary students and the book voucher worth RM200 to
all Malaysian students in Form 6 and institutions of tertiary education.
Households also continue to have access to credit markets, especially for the
purchase of durable assets, supported by more sustainable financing and
accommodative monetary conditions. Besides that, government had also
announced several policy measures to stimulate home ownership for the
middle-income group, including the 1Malaysia People's Housing Scheme
(PRIMA). Last but not least, the Government will continue to finance the budget
deficit from domestic sources, mainly through the issuances of Malaysian
Government Securities (MGS) and Government Investment Issues (GII), given
the high domestic savings and the ample liquidity in the financial system.

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2.2.3 Action taken on Fiscal Policy to reduce the impact of economic
recession

Based on the Malaysian current economic situation nowadays, Malaysias

economy has faced strong headwinds that are having a sizable impact on
economic well-being. Three different interrelated forces are at play: global
developments, declining leadership confidence and, policy failures tied to an
unwillingness to engage in substantive and much needed structural reforms.
Malaysia also faces an unfavorable global environment. The slowdown of the
Chinese economy, Malaysias largest trade partner, has contributed to a sharp
decline in Malaysias GDP growth. While the US economy has begun a
recovery, it has not filled the vacuum as a driver of growth left by Chinas
slowdown. The 1MDB crisis has drawn attention to the indebtedness of the
GLCs and raised concerns about the transparency and viability in the
corporate sector. Malaysia faces severe challenges over the near term.

Despite rejections by the Prime Minister and the Governor of Bank

Negara that the Government will not impose capital controls or peg the ringgit,
as was done at the time of the 1997-98 East Asian financial crisis, there are
some analysts who believe the Government may turn to adopt these measures.
Analysts point to the fact that Bank Negara intervened in the market in recent
months to prop up the ringgit but failed despite the use of some RM 40 billion
of the foreign exchange reserves. As we know, inflation is the controversy issue
in world economic development. It causes many others problem to the country
all to the world. It because the inflation itself is not only burden to that country,
but it also spread the effect to the related country that has relation with them.
Not even one single country can avoid the inflation can happen. It always
happens but the increasing of inflation can cause others problem worsens.
Government applies the various strategies to face the inflation that barge in
Malaysia recently. Bank Negara Malaysia as a central bank act as government
agent controls the economic by implementing several policies to the
commercial bank and the financial institutions. They also give many advices to
public on how to help government to control the inflation.

This policy dealt with government expenditures and taxes. When the
inflation occurs, government will use surplus budget policies by increase the
taxes and reduce government spending. This implementation will lead to lower
income to public and reduce the purchasing power. Government has introduce

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the prudent spending program due to this inflation time by minimizing the cost
of operation of government and lead the government to spend more wisely.
Government also has stop the ongoing development that increase spending to
reduce the outflow of ringgit to the market.

To apply expansionary fiscal policy, meaning that Malaysia's citizen

have more disposable income. They can use their disposable income to make
more investment and consumption. Due to its consume, it is able to stimulate
the economy activity and sustaining growth to ripe the effect of recession. It is
a contagion effect. Furthermore, it will also affect the prices of goods and
services. Since the government applies fiscal policy in year 2009, it raises the
level of aggregate demand which increase gross domestic product (GDP). As
gross domestic product (GDP) increase, unemployment rate and poverty rate
will decrease, raise the level of quality of life and a better distribution of income.
Therefore, Malaysian can enjoy a better life as compare to before.

On top of that, industrial products carry a big influence on the economy

growth and manufacturing sizeable in Malaysia. Electricity, manufacturing and
mining output also raise the level of industrial production index (IPI). Among of
these three activity, manufacturing output carry a high percentage in the IPI.
Therefore, then manufacturing activity increase have raise the GDP and turning
Malaysia into recovery phase.

In Malaysia, measures had already been put in place before something

happen in the future. The government maintained significant fiscal policy
surpluses for five successive years, in addition to policies that encouraged high
rate of saving from private sector. According to Bank Negara Malaysia (BNM)
Fiscal policy in 2016 will continue to focus on fiscal consolidation. The 2016
Budget was recalibrated in January 2016 to incorporate the expected decline
in global oil prices. BNM also pointed out government spending was
reprioritized and measures were introduced to broaden revenue sources.
Fiscal spending will be for high impact infrastructure projects that could have
large multiplier effects by increasing the productive capacity of the economy. It
also said given the expectation of a challenging global financial environment,
Malaysia will likely be confronted by volatile movements in capital flows.

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 Figure 1: Real GDP by kind of economic activity (2010= 100)

However, Malaysias deep and developed financial markets are well-

positioned to intermediate these flows, thus ensuring that the functioning of the
domestic financial markets will continue to be orderly and supportive of the real
economy. Malaysias ability to withstand external shocks will also be increased
by its ample buffers and strong policy frameworks that have been steadily built
over time.

Figure 2: The 2017 Federal Government Budget

Based on the figure above, economic report 2016/ 2017 said that
Malaysia's fiscal deficit is projected to fall to 3% of gross domestic product
(GDP) in 2017, in line with previous official guidance. "The government through
various fiscal consolidation measures has successfully reduced the fiscal
deficit from 6.7% of GDP in 2009 to 3.2% in 2015 and it is predicted to be further
reduced to 3.1% in 2016. According to Prime Minister and also the Minister of

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Finance Datuk Seri Najib Razak, he said that they are committed to achieving
a near balanced budget by 2020.

In absolute terms, the fiscal deficit amount eased from RM43.7 billion
in 2009 to RM37.19 billion in 2015. However, the absolute fiscal deficit figure
is expected to increase to RM38.73 billion in 2016 and RM40.34 billion in 2017,
according to the Economic Report 2016/ 2017.

In explaining its fiscal operations, the report said the government had
to recalibrate Budget 2016 in January this year, when oil prices hit a low of
US$26.39 (RM110.68) per barrel, to ensure its fiscal targets remain on track.

"The recalibration focused on optimization and reprioritization of

operating and development expenditure to ensure that the government's
financial position remains intact without impacting the growth target. Various
revenue enhancement measures were also introduced to generate additional
income to cushion the loss of revenue. These include optimizing revenue from
the redistribution and bidding process of telecommunications spectrum,
enhancing foreign workers levy, relaxing the income tax penalty and reducing
tax leakages at duty-free islands," the report read.

Lastly to strengthen the institutional capacity of fiscal management, the

Fiscal Policy Committee, during its second meeting in May 2016, established
the Fiscal Risk and Contingent Liability Technical Committee to evaluate the
government's fiscal risks and contingent liabilities, and propose appropriate
measures. The committee comprises representatives from the Ministry of
Finance, Economic Planning Unit, Public Private Partnership Unit of the Prime
Minister's Department and Bank Negara Malaysia.

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3.0 CONCLUSION

How successful was the Malaysian alternative strategy? From 1999,after the adoption of the
policies, the economy recovered rather well. Real GDP, which had fallen by 7.4 per cent in
1998, grew again by 6.1per cent in 1999 and 8.3 per cent in 2000. The growth rate slowed
significantly to 0.4 per cent in 2001 due to unfavorable world economic conditions, then
recovered to 4.2 per cent in 2002. The balance of payments current account, which had a
RM15.8 billion deficit in 1997,turned around to surpluses of RM36.8 billion in 1998, RM47.9
billion in1999 and RM32.2 billion in 2000. The Central Banks international reserves had fallen
from RM70 billion (US$27.7 billion) at the end of1996 to RM$59.1 billion (US$21.7 billion) at
end-1997 during the onset of the crisis. It increased to RM$99.4 billion or US$26.2 billion
(1998),RM$117.2 billion or US$30.9 billion (1999) and RM131.4 billion orUS$34.6 billion
(2002). Total external debt had risen from RM97.8 billion(40 per cent of GNP) in 1996 to
RM170.8 billion (64 per cent of GNP) in1997. It then declined to RM162 billion (60 per cent of
GNP) in 1998 and to RM161 billion or US$42.3 billion in 2000 (51 per cent of GNP) before
rising again to RM185.3 billion or US$48.8 billion (55 per cent of GNP) in2002 (Bank Negara
Annual Reports).External debt service payments in 1998-2002 stayed within manageable
levels, equivalent to 5.4 to 7.0 per cent of the value of exports of goods and services. The rate
of inflation had risen from 2.6 per cent in1997 to 5.2 per cent in 1998, but declined to 2.8 per
cent in 1999 and to1-2 per cent in 2000-2002 (Bank Negara and Ministry of Finance).Most of
the banks have recovered, with the level of non-performing loans and risk-weighted capital
ratios within internationally accepted standards. Some local corporations may not have yet
recovered fully to the pre-crisis conditions (and some may never), but many have remained
economically viable. Regarding the effects of the capital control measures, UNCTADs Trade
and Development Report 2000 concludes that: The success of the measures taken was
confirmed by the fact that when the controls were lifted in September 1999 there was an
immediate outflow of only 5.2billion ringgit, and another 3.1 billion in the rest of the year. In
the first quarter of 2000 there was a net inflow of 8.5 billion, an amount roughly equal to what
had flown out at the expiry of the controls. By May 2000total official reserve assets were $32
billion, over six times short-term debt. In December 1999 Malaysias long-term foreign
currency rating was raised to BBB and more recently the country was returned to the Morgan
Stanley Capital International emerging market securities benchmark indices, indicating a
normalization of relations with international capital markets. (UNCTAD 2000:
p55)Comparisons have been made between the recovery in Malaysia and that in Thailand,
South Korea and Indonesia. It is true that in Thailand and South Korea at least there has also
been recovery and growth. Some analysts point out that the Malaysian policy example may

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have encouraged the IMF to relax its initial contractionary fiscal and interest rate policies in
the three countries, and thus that the Malaysian policies indirectly assisted the recovery in
these countries. The controversies on the comparison between the performance of Malaysia
and that of countries undergoing IMF policies will continue. However, it cannot be denied that
the Malaysian experience shows that an alternative to the IMF policy package can and does
exist and that it can produce results that are at least as successful.

Can the Malaysian strategy be replicated? As stated above, one size-does-not-fit-all also
applies here, and the policies that may have been appropriate for Malaysia may not be so for
other countries either because they have different conditions (economic, political, institutional,
etc.) or because they have different goals. For a start, Malaysia did not have a problem
servicing its external debts, so it had a choice of whether to seek IMF assistance. Countries
facing a debt default may not be in such a comfortable situation and if they turn to the IMF for
assistance, then many of the options open to Malaysia may not be available to them, unless
the IMF changes its own approach. In relation to capital controls, the policies Malaysia took
were adapted to its own peculiar circumstances. The lesson is that countries can and should
consider the use of capital controls as part of the array of policy tools available. There is a
large range of capital controls that can be applied to inflows and outflows. It may be that to
prevent a crisis, controls on inflows could be more efficient. In any case, the Malaysian
regulation limiting foreign loans to local companies to only cases where the loans will yield
foreign exchange earnings, has proven to be very useful in safeguarding Malaysia from the
excessive and rapid build-up of short-term foreign debt that was a major factor in the Thai,
Indonesian and South Korean crises. The Malaysian capital controls were applied only to
capital account outflows and mainly to local residents. There were no restrictions on trade-
related transactions or transactions involving FDI and this was seen to be wise by the policy
makers as Malaysia has an economy that is very trade-dependent and also very reliant on FDI
and they rejected the option of capital controls that could disrupt either. Foreign funds and
foreigners were affected mainly in relation to short-term portfolio investment. The measures
on that were also relaxed and then abolished relatively rapidly. Countries facing a different
situation could more appropriately choose to apply different controls over a different set of
flows. For a fixed exchange system and a system of capital controls to work may require some
degree of institutional capacity and administrative efficiency in order to have successful
implementation and prevent leakages or black markets. Malaysia has a relatively capable
administrative machinery, and this contributed to the successful implementation of the
policies. Countries lacking this capacity may not be able to implement the same kind of policies
so successfully. This point has often been made. However, a developing country need not be
put off these policies simply because it does not have a very efficient administrative machinery.

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After all, there were many predictions (from the IMF, market analysts and investment funds)
that the Malaysian currency policy and capital controls would not work and would plunge the
country into disaster, and yet the country was able to implement the policies successfully.
Regarding the core macroeconomic policies, the Malaysian strategy was intended to follow
the basic Keynesian prescription that in recessionary situation, a package of low interest rates
and expansionary monetary and fiscal policies would help revive the economy. The Malaysian
strategy was unique only because the IMF conditionality appears to prohibit recipient countries
from following this prescription. Many developed countries, including the United States, follow
the same strategy that Malaysia did. It remains strange to neutral observers why the IMF does
not allow its developing country borrowers to adopt policies that the US, its most important
creditor member, adopts, but instead insists on contractionary macroeconomic policies that
usually induce recessionary conditions.

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4.0 REFERENCES

Chin, J. (2016, March 23). BNM projects economy to grow 4% to 4.5% in 2016. Retrieved from
Business News: http://www.thestar.com.my

Datuk Ramesh Chander & Bridget Welsh. (2015, October 19). Solving Malaysias economic
crisis. Retrieved from New Mandala: http://www.newmandala.org

Essays, UK. (November 2013). Monetary and Fiscal Policy Monetary Policy Economics
Essay. Retrieved from https://www.ukessays.com

Essays, UK. (November 2013). The Economic State and Policies in Malaysia Economics
Essay. Retrieved from https://www.ukessays.com

Essays, UK. (November 2013). The Current Inflation Situation in Malaysia Economics Essay.
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Essays, UK. (November 2013). Malaysia Economy and Relationship of Fiscal Policy
Economics Essay. Retrieved from https://www.ukessays.com

Essays, UK. (November 2013). Fiscal Policy in Malaysia Economics Essay. Retrieved from
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Kimberly A. (2016). Do You Know the 5 Warning Signs of a Recession?

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Kimberly A. (2016). 11 Causes of a Recession.

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MALAYSIA. (2000).
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Yeap, C. (2016, October 21). Malaysia Commits to 3% Fiscal Deficit Target for 2017.
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http://www.theedgemarkets.com/

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5.0 APPENDIX

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