Asian Financial Crisis: The Storm of 1997
When the tide of prosperity receded, exchange rates exposed debts and the cracks between the Prime Minister and his deputy
What changed first were the small numbers on airport money exchange counters.
One US dollar was originally exchanged for about 2.5 ringgit.
Then the number jumped upwards. Three. Four. On 7 January 1998, the ringgit dropped to approximately 4.88 to one US dollar at one point. 1,2,3
To a trader, it was a curve.
To a family sending their child to study in the UK, it meant tuition fees suddenly became expensive. To a company that borrowed US dollars to buy machinery, it meant the exact same debt became heavier overnight. To a construction worker, it could mean an abandoned building.
The most abstract term during the years of prosperity was capital inflow.
After the tide receded, it had a more specific action: leaving.
Before the Storm, the Successor was Already at the Door#
In 1982, shortly after Mahathir became Prime Minister, Anwar was still standing outside UMNO's doors.
He was a leader of the Malaysian Islamic Youth Movement (ABIM), an orator capable of rallying university students, religious youth, and urban Malay middle-class folks. Many originally thought he would remain outside the establishment to criticize the government, perhaps even drawing closer to PAS.
Mahathir, however, opened the door and invited him in. 9,10
This invitation was useful to both men.
Mahathir needed a young leader capable of dialoguing with the Islamic revival movement to prevent UMNO from ceding an entire new generation of Malay Muslims to PAS. Anwar, meanwhile, chose to drive education, Islamic finance, and social policies from within the government rather than forever standing offstage demanding others to implement them. 9,10
After joining the party, he rose rapidly.
Minister of Culture, Youth and Sports.
Minister of Agriculture.
Minister of Education.
In 1991, Minister of Finance.
These positions allowed Anwar not only to retain his network from the youth movement but also gradually amass supporters among state leaders, UMNO divisions, the corporate sector, and the bureaucracy. Mahathir was still the leader who brought him into the center of power; but Anwar was no longer just the student behind the leader. 9,10
In 1993, the Deputy Left the Room First#
During the 1993 UMNO party elections, Anwar challenged the incumbent Deputy President and Deputy Prime Minister, Ghafar Baba.
Before party delegates officially cast their votes, the nominations had already revealed the gap. Ghafar withdrew from the race and subsequently resigned as Deputy Prime Minister; Anwar was elected uncontested as UMNO Deputy President and became Deputy Prime Minister in the same year. His allied "Wawasan Team" (Vision Team) also swept three Vice President seats and key posts such as UMNO Youth Chief. 9,10
This was a transfer of power without the climax of a ballot count.
The winner's strength was precisely so great that his opponent exited without waiting for the vote.
Mahathir did not fall in this party struggle. He still firmly held the Presidency and Prime Ministership, continuing to dictate the cabinet and national direction. But the 1993 result illustrated to the entire UMNO: Anwar was not a deputy who could only await grace. He could organize his own team, sway division nominations toward himself, and carry a cohort of contemporary leaders into the Supreme Council. 9,10
From that day on, Anwar held two identities.
He was the designated successor in Mahathir's intended path.
And he was a potential challenger who had already proven his independent strength.
These two identities could overlap during times of prosperity.
In a crisis, they would tear at each other.
The Most Stable-Looking Time#
In the 1995 general election, Barisan Nasional secured 162 seats. The Prime Minister and Deputy Prime Minister stood together in the ruling coalition's most glorious victory. In the UMNO party elections the following year, Mahathir and Anwar were re-elected unopposed as President and Deputy President respectively; Mahathir even publicly stated that he would not stay for too long and confirmed that Anwar would succeed him. 9,11
From the outside, the succession issue seemed resolved.
From the inside, the problem had merely changed verbs.
It was no longer about who would take over.
It was about when they would take over.
Mahathir did not announce a handover date. The more Anwar looked like a future Prime Minister, the easier it was for his every word today to be interpreted as the direction of the future government; every party post won by his allies was increasingly viewed by the old guard as an early clearing out of the room. 9,11
The political language of the two men was never entirely identical to begin with.
Mahathir believed that a strong state, heavy industry, mega-projects, and locally nurtured entrepreneurs by the government could rapidly elevate the status of a post-colonial nation. Anwar was not an outsider to this system: having served as Finance Minister for years, he participated in budgets, privatization, and high-speed growth, and had to bear the cabinet's collective responsibility. 6,9,10
But at the same time, Anwar was more willing to converse with international financial circles about governance, transparency, civil society, and a more open interpretation of Asian values. Between him and Mahathir, it was not a pure reformer suddenly encountering an old establishment gatekeeper; rather, it was two sets of priorities within the same government, easily masking each other when there was enough money. 5,6,9
During periods of growth, the government could simultaneously build mega-projects, support businesses, expand education, and let different factions share opportunities.
During a crisis, every company saved meant other companies went unsaved; every project cut could sever resources for a particular political network; every public criticism of "cronyism" could sound like naming people close to the Prime Minister.
This was the political weather inside the room before July 1997.
There was no public fallout.
Yet the designated successor was already standing at the door, and the Prime Minister of sixteen years had not yet handed over the keys.
The Wind Blew in from Bangkok#
On 2 July 1997, Thailand abandoned its defense of the baht.
Investors immediately re-examined the entire region: Which banks had borrowed too much short-term foreign currency? Which real estate prices relied on continuous credit? Which companies had stronger political connections than cash flows?
Malaysia was not Thailand. Its pre-crisis fiscal position and foreign reserves were not the worst, and its export manufacturing base was broader. 2,12,6
But years of rapid growth had pushed up another set of numbers. Private credit expanded rapidly, stock and property prices soared, the current account had briefly run large deficits, and companies borrowed future income early. As long as foreign capital continued to believe in tomorrow, the machine could keep turning. 1,2,12
When confidence reversed, everyone wanted to rush out the narrow door at the same time.
Bank Negara initially defended the ringgit before later giving up the hard peg. Pressures on interest rates, credit, and the stock market transmitted mutually; company asset prices fell, collateral thinned, and banks began recalculating which borrowers could still repay. 1,2
A crisis is not a visible hand knocking down a building.
It first alters prices, and then lets prices force out the consequences of every old decision.
Two Men Started Using Different Words#
Anwar was both Deputy Prime Minister and Finance Minister.
His public language increasingly emphasized market confidence, transparency, accountability, anti-cronyism, and structural reform. In April 1998, he warned that even legitimate support policies could degenerate into patronage and rent-seeking, allowing dependents to siphon off economic life. 5,6
This was not an ordinary economic commentary. In UMNO politics, "cronyism" automatically prompted listeners to think of names, companies, contracts, and succession struggles.
Early government responses included cutting expenditure, postponing mega-projects, tightening credit, and pushing for financial consolidation. Malaysia did not sign an IMF loan program, but a portion of its measures aligned with the IMF's prevailing prescriptions of austerity, reform, and restoring confidence. 2,8,6
Mahathir increasingly rejected this prescription. In his view, high interest rates and austerity would crush local enterprises that still had productive capacity, allowing foreign capital to buy them at bargain prices; the scale and speed of currency trading also subjected national policies to offshore markets. 3,8
One said: first make the market believe we will change.
The other said: first shut the door that allows the market to attack us.
When companies fell and party succession hung in the balance, every policy choice simultaneously altered who was saved, who lost power, and who looked more like the next Prime Minister.
Who Was Saved Could Not Be Read from Company Names Alone#
During the crisis, the government established Danaharta to handle non-performing assets, Danamodal to recapitalize banks, while corporations and financial institutions also underwent mergers, acquisitions, and bailout controversies. 2,12,8
"Saving a company" never has only two answers.
Allowing large enterprises to collapse immediately passes the loss on to workers, suppliers, depositors, and the entire credit system; unconditional bailouts allow shareholders and power holders to retain the benefits while handing the failures to the public.
The real dividing line lies in the conditions: Did the original shareholders absorb the losses first? Was the management replaced? Were the valuations transparent? What was the relationship between the rescued enterprise and the decision-makers? Did the state recover the funds years later?
These questions necessitate attributing political responsibility.
Mahathir was the Prime Minister and the final arbiter of economic direction; Anwar was the Finance Minister until his dismissal, bearing ministerial responsibility for early budgets, financial regulation, and austerity responses; the cabinet, the Finance Ministry, and Bank Negara also bore collective, fiscal, and regulatory responsibilities respectively. 1,2,5,8
But the Asian Financial Crisis was not a simple corruption case that could easily be blamed on one minister "creating" it. External shocks came from regional capital reversals, while domestic vulnerabilities accumulated from years of credit, corporate governance, and political-economic structures. Blaming everything on Anwar or Mahathir alone went further than the evidence allowed. 2,12,6
Injuries also did not line up neatly by the three major races. The unemployed, indebted families, retail investors, contractors, and suspended project workers hailed from different communities; existing macroeconomic data does not support portraying the crisis as harming only one specific ethnic group. 2,12
On September 1, That Door Closed#
In January 1998, the National Economic Action Council (NEAC) was formed. By 1 September, the government introduced selective capital controls, cutting off offshore ringgit trading and restricting certain capital flows; on 2 September, the ringgit was pegged at 3.80 to the US dollar. 2,3,8
At the time, this was a high-stakes rebellion.
Critics feared investors would never dare return, and that the controls merely bought breathing room for cronies. Supporters argued that exchange rate stability and monetary policy autonomy allowed the government to cut interest rates and restart the economy, rather than continuing to trade recession for market trust. 2,3,4,7
Subsequent research has not provided a completely unanimous verdict.
Kaplan and Rodrik's comparison concluded that the controls yielded better macroeconomic outcomes and found no evidence they were merely a massive crony bailout. Dornbusch, however, emphasized that the worst phase regionally had passed when the controls were introduced, and that South Korea and Thailand were also recovering, hence Malaysia's rebound could not be entirely credited to that closed door. 4,7
What can be confirmed is that the economy actually shrank by about 7 percent in 1998; growth resumed thereafter. The controls did not erase the losses that had already occurred, but they altered the tools the government had to manage the aftershocks. 2,12,3
On the Same Day, Another Door Closed#
On 2 September, the same day the fixed exchange rate was announced, Anwar was dismissed from his positions as Deputy Prime Minister and Finance Minister. 2,8
From then on, economic debate and power struggle could no longer be pulled apart.
Mahathir's camp later emphasized that the dismissal involved allegations against Anwar's character and behavior; Anwar and his supporters claimed it was to stop the succession, combat corruption, and prevent reform. The subsequent arrests, trials, black eye, and judicial cases require point-by-point examination of evidence in the next article, and cannot be summarily concluded here with a single phrase like "differing economic directions."
But the sequence of time was itself shocking enough.
One day, the state closed a door on capital flight.
The next day, the Prime Minister closed the door on his deputy's path to the premiership.
The Storm Did Not End in the Trading Room#
After Anwar left the cabinet, he did not disappear quietly.
Supporters took to the streets, shouting a word that originated from the political upheaval in Indonesia but swiftly became Malaysian political language: Reformasi.
At that time, no one was arguing only about exchange rates anymore.
People began arguing about police powers, the judiciary, fair elections, cronyism, prime ministerial authority, and whether an alliance that had ruled for over forty years could still correct itself.
On 20 September, this word moved from the podium to the outside of the National Mosque, and then toward Dataran Merdeka. That night, it followed Anwar back inside the doors of his home. 13,14
What happened next was no longer an abstract succession struggle.
Masked police forced their way into the house; nine days later, when the former Deputy Prime Minister reappeared before the public, a dark circle had formed around his left eye. That ring of color would force the entire country to ask: after the police take a person away, who watches the police? 13,14
Next article: "Reformasi: That Night, The Door Was Smashed In". During the day of 20 September, Anwar was still standing before the crowds; after night fell, a squad of masked police officers arrived outside his door.
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