The 1997 Asian Financial Crisis didn’t just break markets—it broke systems we’re still expected to live in, from work to wages to what the ringgit can’t buy.
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14 Jul 2025
7 Min Read
Afrina Arfa (Alumni Columnist)
The 1997 Asian Financial Crisis didn’t just break markets—it broke systems we’re still expected to live in, from work to wages to what the ringgit can’t buy.
Over the past few decades, East Asian economies have been admired as some of the most successful emerging market economies in the world. Cities across Indonesia, Malaysia, Thailand, and South Korea are now hubs of economic activity—bustling with tourism and home to large populations that drive innovation. But as we observe the rapid rise of these East Asian nations, it is easy to overlook the contagion that once plagued the region: the 1997 Asian Financial Crisis.
That July marked the beginning of a severe financial crisis, drawing East Asia into the global spotlight as the region experienced widespread economic collapse, sharp currency devaluations, and deep social and political unrest. Millions of people suffered financial losses, businesses went bankrupt, and governments depleted their reserves. Though it may seem like a chapter long closed, many of the challenges we face today—rising debt levels, stagnant wages, and currency pressures—feel eerily familiar. As Malaysia finds itself battling many of the same issues it faced then, albeit under different circumstances, it is worth asking: Have we truly learned our lesson?
The 1990s were a period of economic growth and prosperity for Indonesia, Malaysia, the Philippines, and Thailand—collectively known as the ASEAN-4. This transformation was largely driven by increased intra-Asian trade and investment, alongside large short-term foreign capital inflows, much of which was directed into high-risk sectors such as real estate and stock markets. When borrowed money is channelled into speculative investments, it can inflate asset prices beyond their intrinsic value, creating what are called asset bubbles—where prices are fuelled more by investor sentiment and excessive demand than by underlying market fundamentals. These bubbles are inherently unstable, and their values can collapse overnight.
During this period, the ASEAN-4 experienced a credit boom. The growth of credit in both banking and non-bank financial institutions eventually outpaced the growth of the real economy. In response to the growing risks and shifts in credit conditions, governments raised interest rates in an effort to protect their currencies. The goal was to stabilise the financial system by making borrowing more expensive and slowing the credit surge. However, the move backfired—it triggered a sharp decline in property prices. As a result, many businesses and individuals were left unable to service their loans, and the burden of debt became unsustainable.
Thailand was the first to fall victim to a mass exodus of foreign investors, prompting those same investors to reassess their positions in neighbouring countries. According to what economists refer to as the wake-up call hypothesis, foreign investors realised that other countries in the region shared similar vulnerabilities—excessive debt, weak banking systems, and risky investments. They quickly pulled out their funds, setting off a domino effect across East Asia.
The International Monetary Fund (IMF) played a significant role in the crisis by providing emergency loans and implementing structural adjustment programmes aimed at stabilising affected economies. While Indonesia and Thailand (as well as South Korea) accepted these financial rescue packages, Malaysia rejected what some critics considered harsh IMF conditions and retained control over its own economic policies.
Controversial at the time, Malaysia made a winning move in introducing strict capital controls as part of a broader economic stabilisation strategy. These controls included restrictions on moving large sums of money across borders and halting offshore trading of the ringgit. Alongside these controls, the ringgit was pegged at RM3.80 per US dollar to reduce volatility, while tight fiscal and monetary policies were adopted to curb inflation and support recovery.
While Malaysia weathered the worst of the 1997 crisis, nearly three decades on, the nation is once again showing signs of familiar economic cracks—though in different forms and under different circumstances. Before the ringgit was pegged at RM3.80, it had fallen from RM2.48 in March 1997 to RM4.88 by January 1998. The situation may seem less dramatic today, but similar vulnerabilities remain. In 2024, the ringgit appreciated modestly by 2.7% against the US dollar, yet global trade tensions and domestic uncertainties have made future economic growth difficult to predict. Several Malaysian research houses have revised their full-year forecast downward, and Bank Negara—who announced an official forecast of 4.5% to 5.5% last October—is expected to revise that figure in the coming months.
As economic growth slows and pressure on the currency persists, the burden increasingly falls on the population. Heightened trade tensions have prompted a wait-and-see approach among businesses, dampening investment confidence. While the labour market remains relatively stable for now, a prolonged slowdown could lead to job losses and worsening unemployment, further weakening consumer spending. According to a 2023 report by the Department of Statistics Malaysia (DOSM), just over 40% of fresh graduates are underemployed—working in jobs that do not require a degree, particularly in the growing gig economy. As purchasing power erodes, more households are turning to borrowing just to cover everyday costs, adding to national debt levels.
While the debt problem in 1997 was triggered by corporations that had over-borrowed, today it has shifted from boardrooms to living rooms. Household debt in Malaysia remains one of the highest in the region, reaching RM1.63 trillion by the end of 2024—equivalent to 84.2% of the country’s gross domestic product (GDP). To make matters worse, easy access to short-term credit through buy-now-pay-later (BNPL) schemes and credit cards has left many young Malaysians caught in cycles of interest payments that they may be unable to repay. Amid economic instability, widespread underemployment, and rising household debt, Malaysia appears to be echoing the effects of the 1997 crisis.
Following the crisis years, countries in the region implemented a series of reforms to strengthen their financial systems and reduce the risk of future shocks. A major focus was placed on the financial and corporate sectors, where failing banks and companies were either shut down or restructured under government intervention. To safeguard financial stability, stronger regulatory frameworks and supervisory mechanisms were established across the region.
Given the lessons learned, it is unlikely that Malaysia would experience a crisis as severe as in 1997. Nevertheless, the current economic landscape still presents vulnerabilities—for both the country’s growth and its people. While corporate overborrowing triggered the 1997 crisis, today it is high household debt that poses a comparable threat. Elevated debt levels limit the country’s capacity to rebound quickly in the event of a sharp recession—a lingering worry amid ongoing trade tensions with the US. Furthermore, Malaysia continues to grapple with structural challenges, such as stagnant wage growth, rampant underemployment, and persistent brain drain—all of which leave the economy more exposed to external shocks.
At the policy level, some critics argue that Malaysia’s fiscal strategies may be amplifying its economic vulnerability. One such concern is the expanded Sales and Service Tax (SST), gradually introduced from 2024 and recently increased from 6% to 8% on 1 July 2025. While some see it as a necessary step to boost government revenue, others warn of spillover effects that could impact both higher- and lower-income households through increased living costs.
Still, not all signs point to pessimism. Malaysia today is far better equipped to weather a crisis than it was in 1997. Despite the challenges, the population is more educated, digitally literate, and financially aware—equipped with better ‘tools’ to navigate economic uncertainty. Bank Negara Malaysia, too, now operates with stronger oversight, higher foreign reserves, and more robust risk management systems—measures that significantly reduce the likelihood of a repeat crisis.
Beyond stronger institutions, additional financial instruments have emerged in recent years, including the Employees Provident Fund (EPF), social protection schemes like the Social Security Organisation (SOCSO), and a growing ecosystem of fintech solutions that can help stabilise the economy in times of financial distress. Ultimately, whether Malaysia can withstand another financial crisis will depend on how well it balances fiscal responsibility, sustainable growth, and social equity in an increasingly volatile global landscape.
As we reflect on the Asian Financial Crisis of 1997—a wave of disarray that swept through the region, including Malaysia—it is clear that we are still living its legacy. From a persistently weak ringgit and high debt levels to fragile job markets and policy uncertainty, many of today’s challenges mirror the vulnerabilities revealed decades ago.
For Malaysia’s younger generation, the lessons of 1997 are more than historical footnotes. They serve as a reminder that economic crises rarely strike without warning, and that recognising the signs early is essential to avoiding the fallout and shaping a more resilient, equitable future.
Afrina Arfa is a Bachelor of Finance and Economics (Honours) alumna of Taylor's University. She spends her time indulging in economic news, hoping to inspire others to think beyond the constraints of society.
