The Asian financial crisis, the ringgit peg, and capital controls

The ringgit traded at about 2.48 to the US dollar in March 1997, but as the Asian financial crisis spread, Bank Negara Malaysia spent close to 1.5 billion US dollars trying to defend that level before being forced to let the currency float on July 14, 1997; by January 1998 the ringgit had fallen to roughly 4.88 per dollar. Capital kept fleeing through 1998, and by the end of August that year Malaysia had lost about a third of its foreign reserves, some 10.5 billion dollars, with the ringgit down about 65 percent from its pre-crisis level. Rather than following the interest-rate-hike, IMF-style path taken by Thailand, Indonesia and South Korea, Bank Negara took the unorthodox route of re-pegging the ringgit at 3.80 per dollar on September 1, 1998 and imposing selective capital controls, including a twelve-month holding period on portfolio outflows and a ban on offshore ringgit trading. The controls let Malaysia cut interest rates to support the domestic economy without triggering further currency flight, a contrarian approach that was heavily debated at the time but is now widely cited as having shortened Malaysia's recession relative to its neighbors.