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58. The prompt action taken by Bank Negara to step in to intervene in the management and capital injection of the three ailing banks and the announcement of the rescue plans for the 24 DTCs during the course of 1987 and early 1988 had stabilized public confidence in the financial system and avoided the dangers of contagion spreading, at a time when the economy was in the trough of the recession. By the fourth quarter of 1986, commodity prices began an upturn, leading to an immediate injection of liquidity into the banking system from growing export income. As it turned out, 1987 proved to be a year of strong recovery, with GDP growing by 5.2% in real terms. The terms of trade improved by 12.4% and the current account in the balance payments recorded in 1987 a M$6.4 billion surplus or 8.6% of GNP, with gross external, reserves rising to M$19.4 billion or 7.4 months of retained imports. Although the budget of the Federal Government remained in deficit, despite continued retrenchment of development expenditure, the financing deficit of the Federal Government was reduced sharply to 5.6% of GNP by 1988, allowing the Government to prepay over M$4 billion of its external debts. By 1989, the national external debt had fallen sharply to M$42 billion or 43.9% of GNP as against 76.1% in 1986. Clearly, the structural adjustment programme was beginning to yield results.

59. In 1988, the economy continued to rebound with vigour, with real GDP growth of 8.1%. With the depreciation of the ringgit, the terms of trade improved by 12.4% in 1987, while export proceeds jumped by 24.6% in 1987 and 21.3% in 1988. As confidence revived, the KLSE market capitalization rose by 45% from the treugh just after the October 19, 1987 crash to a recent peak of M$101.9 million on August 9, 1988. Similarly, property prices began to firm with strong sales in low-cost housing in urban centers and revival in commercial prope ty prices from the trough of M$180 per sq. ft. in 1986 to M$279 psf in early 1989. The reflation in asset prices and erterprise cash flow had their beneficial impact on bank profitability. Preliminary unaudited data on bank profits revealed a rebound in pre-tax profits to M$794 million in 1988, compared with M$125 million in 1987, as bad debt provisions fell by 28.1%. Most of the recovery was in the write-back of provisions for non-performing loans, amounting to M$828 million in 1988, or nearly double the amount in the previous year.

60. Given the improvement in the banking environment, a radical switch in approach to the problem of non-performing loans was made when the focus of loan rehabilitation was switched from the bank level to the enterprise level. The Central Bank established a M$500 million Enterprise Rehabilitation Fund in 1988, aimed at reducing the overhang of stalled projects and non-performing loans. The Fund, financed by Bank Negara and managed by a development bank, would provide seed capital to recession-hit Bumiputera (indigenous) enterprises which have been found to be fundamentally viable. The projects would be co-financed with the existing lenders, which would provide additional working capital for the turnaround enterprises. Specialist Turnaround Groups, comprising leading professionals in the fields of manufacturing, trading, agriculture and property, would evaluate the viability of eligible enterprises for recommendation for assistance under the Fund.

61. It may still be too premature to evaluate objectively the results of the bank restructuring exercise for the DTCs, and ailing banks and finance companies. In the case of the 24 DTCs, 11 DTCs had already been resolved, with the refund