On IMF debt and capital control: evidence from Malaysia, Thailand, Indonesia, the Philippines and South Korea
| Published date | 31 July 2020 |
| Pages | 143-162 |
| DOI | https://doi.org/10.1108/JFRC-08-2019-0108 |
| Date | 31 July 2020 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Azhar Mohamad,Imtiaz Mohammad Sifat,Hassanudin Mohd Thas Thaker,Anwar Muhammad Noor |
On IMF debt and capital control:
evidence from Malaysia,
Thailand, Indonesia, the
Philippines and South Korea
Azhar Mohamad
Department of Finance, Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Imtiaz Mohammad Sifat
Department of Accounting and Finance, School of Business, Monash University,
Subang Jaya, Selangor, Malaysia
Hassanudin Mohd Thas Thaker
Department of Economics and Finance, Sunway University Business School,
Sunway University, Petaling Jaya, Selangor, Malaysia, and
Anwar Muhammad Noor
Institute of Islamic Banking and Finance,
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Abstract
Purpose –This study aims to investigate the effects of capital control and external debts after the 1997
financialcrisis.
Design/methodology/approach –Using system estimation approach, the authors estimate a panel
data-based econometric model for data on Malaysia, Thailand, Indonesia, the Philippines and South Korea
from 1990 to 2017.
Findings –The authors find that on average, thecrisis-hit South East Asian economies choosing external
debt perform better in achieving greater economic growth and rebound better compared to economies
imposingcapital control.
Originality/value –This study attempts to answer whether a crisis-hit country should impose capital
controlor opt for externaldebt to recuperate from the crisis.
Keywords IMF, Financial crisis, Capital control, External debt, Economic growth
Paper type Research paper
1. Introduction
The roaring 1990s saw the ascension of many Association of Southeast Asian Nations
(ASEAN) economies to new heights.Aside from the four Asian Tigers, Malaysia, Indonesia,
the Philippines and Thailand exhibited tremendousgrowth. Pursuit of ambitious monetary
policies spurred rapid development along with moderate but healthy inflation. For a
considerable period, macro-economic indicators were sound, financial institutions healthy,
JEL classification –F30, F43
IMF debt and
capital control
143
Received14 August 2019
Revised16 February 2020
29May 2020
Accepted6 July 2020
Journalof Financial Regulation
andCompliance
Vol.29 No. 2, 2021
pp. 143-162
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-08-2019-0108
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
domestic consumptionrobust, stock market indices bullish and analyst reports sanguine. As
the economic conditions began signs of reversal and unfurl into a crisis, the eventual
magnitude of the crisis and subsequent time needed for recovery surprised most experts.
Meanwhile, the crisis-riddencontagion catalyzed currency depreciations and spurred socio-
political disruptions in mid-1997. Initially, the currency market went bust in Thailand as a
consequence of Thai CentralBank’s decision to no longer peg the Baht to the US$. Currency
depreciation spread quicklyescalated throughout South East Asia resulting in stock market
depression, diminished import incomes and in some cases topplingof government. Table 1
shows the turn of events during 1997–1998South East Asian financial crisis.
As a ripple effect of the crisis, some countries embraced protectionist measures to
safeguard stability of own currency. Malaysia, for example, opted for capital controls,
whereas Thailand, South Korea and Indonesia underwent governmental and economic
policy overhaul at the behest of the International Monetary Fund (IMF). This brings us to
the issue of capital control; a means of regulating the flow of money in and out of domestic
economy. Economists’views on it are multifarious. While some extol its ability to facilitate
free movement of capitalacross economies, others castigate its straiteningeffects on growth,
productivity and mobility. Induced by factors such as globalization and financial market
integration, lately most advanced economies have adopted a more liberal approach when it
comes to capital control.Developing nations, however, remain sporadic exponentsof stricter
controls as their typically low reserves makethem vulnerable to volatility. It is noteworthy
that despite generally openapproach to capital control measures, most advancedeconomies
still have ad hoc contingency plans in place to forestall sudden mass capital exit or to deter
speculative attackon domestic currency.
A common feature of the crisis-ridden Asian economies of the 1997 ordeal was massive
external debt. In economic parlance, it refers to the total debt one country owes to another
country (or organizations). It also contains payments and arrears beholden to international
organizations such as IMF. The debt may be in form of fees for goods and services, or
outstanding credit because of a negative balance of trade. During exigent periods of the
economy, borrowing from foreign countries provides financial cushion to the countries hit
Table 1.
1997–1998 South
East Asian financial
crisis turn of events
May–July 1997 Pressure on Thailand, exchange control, two-tier market, devaluation
July 1997 Philippines decides to float peso (and goes to IMF), Malaysia abandons
support for the ringgit, Thailand goes to the IMF
August 1997 Thailand suspends 42 banks, Indonesia abandons rupiah support, Malaysia
restricts short selling, Indonesia restricts credit for rupiah trading
October 1997 Indonesiagoes to the IMF, Malaysia announces austerity budget, HK Dollar
under attack
November 1997 South Korea abandons won support and goes to the IMF
December 1997 Rescue package for South Korea
January 1998 Malaysiaannounces full deposit guarantees
January–August 1998 Asian IMF packages revised, financial restructuring, downgrading
May 1998 Indonesia’s Suharto steps down
August 1998 Russian crisis, Yen peaks
September 1998 LTCMcrisis, Malaysia imposes capital controls, Deputy Prime Minister
Anwar Ibrahim deposed
September–November 1998 Fed cuts rates by 75 basis points
Notes: This table shows the turn of events during the 1997–1998 financial crisis. The content is taken from
Dornbusch (2001) and improvised; LTCM = Long Term Capital Management; IMF = International
Monetary Fund; HK = Hong Kong
JFRC
29,2
144
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