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Foreign Exchange

fluctuation impact onMalaysian economy


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Basics ofEconomy:

DEMAND

&

SUPPLY


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How do you measure

ECONOMIC

PERFORMANCE?


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ECONOMIC PERFORMANCE

BOP

FDI

INFLATION

SOCIAL

INTVN.

ECONOMIC NON ECONOMIC

IMPORT

&

EXPO

RT

ENVIRONMENT

TAXATION

QUALI

TY

OF

LI

FE

FOREIGN EXCHANGE CHANGES


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BOPCountrysAccount statement

BOP (Balance of Payment)

Method country use to

monitor international

monetary trade for a

specific period

It takes into account of

countrys debit and credit

(indicates whether

country is in trade surplusor deficit)


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BOP

Financial Account

Capital Account

Current AccountMarks inflow & outflow of:

Goods & services

Earnings from Investment(Public & Private)

Records all international

capital transfers

(Acquisition or disposal of

non financial assets needed for

production but has not beenproduced yet)

Records all international

investment in business,

estate, bonds & stocks

Includes foreign reserves,gold, special drawing rights.

ideally


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BOP

Current Account

Capital Account

Financial AccountBalance of

Trade


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BOP

Current Account

Capital Account

Financial AccountFX changes


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FX

changes

RM

cheaper

RMexpensive

RM weakens

RM strengthens

Buy

MORE

BuyLESS

Export

Surplus

Export

Deficit

If import

remains

Eventually market balances :

Purchase power parity theory


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RM strengthens

but shows

increase in BOT.

Why?

Source from : BNM

RM weakens

show increase in

BOT (Demand for USexport increases)


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1

2

3

4

5

6

7

8

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

RM Vs Other Currencies

Yen USD GBP

Malaysian trade (export)

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

%ofMerchandiseexport

Year

Merchandise Export

Ores and metals exports

(% of merchandise

exports)

Manufactures exports (%

of merchandise exports)

Fuel exports (% of

merchandise exports)

Food exports (% of


Agricultural raw materials

exports (% of


0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

%ofco

mmercialserviceexport

Year

Commercial service export

Travel services (% of

commercial service

exports)

Transport services (% of

commercial service

exports)

Insurance and financial

services (% of commercial

service exports)

Merchandise exportreduce (~10%) & fuel

export increase (~10%)

Source from : BNM


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1

2

3

4

5

6

7

8

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


Yen USD GBP

Malaysian trade (imports)

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

%of

Merchandiseimports

Year

Merchandise Imports

Ores and metals imports

(% of merchandise

imports)

Manufactures imports (%

of merchandise imports)

Fuel imports (% of

merchandise imports)

Food imports (% of


Agricultural raw materials

imports (% of


0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

%ofcommercialserviceimports

Year

Commercial service imports

Insurance and financial

services (% of commercial

service imports)

Computer,

communications and

other services (% of

commercial serviceimports)

Travel services (% of

commercial service

imports)

Merchandise importreduce (~5%) & fuel import

increase (~5%)

This could have caused

BOT +

Source from : BNM


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0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

550000

600000

650000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

TRADE DIRECTION (RM MIllion)

Rest of the World

Other East European

Russia

Other West European

EURO

Canada

USA

New Zealand

Australia

Other Far-East Country

India

KoreaTaiwan

Hong Kong

China

Japan

ASEAN

Malaysias direction of trade

19951. ASEAN

2. USA

3. EURO

4. JPN

20101. ASEAN

2. CHINA

3. EURO

4. JPN

5. USA

Top trading partners(On ascending manner)

switch

Source from : BNM


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FDI Capital inflowto country

FDI (Foreign Direct Investment)

Alluring foreigninvestor has always

been a key strategic

for Malaysia GDP

growth

Investment incentive Act (1968)

Est. Free Trade Zone (1970)

Open policy (1980)

Promotion of Investment Act

(1986)


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FDI

FX Exchange

Political & Social

Labor

Weak RM will lure more

investor

Cheap cost of setup & labour(Normally produce sub parts to export

back to origin country for assembly)

Political stability one of the

main factor in FDI decision

Corruption and social stability

amplifies this factor further

Large qty of skilled labour is

essential(Added with Malaysia poor labour

union)


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FDI

FX Exchange

Political & Social

LaborDONT

FAVOU

R

FAV

OURS

RM weakens

RM strengthens


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Asian

FCInvestor

skeptical

of Msia

mkt

situation

Source from : BNM

Post

FCPresume

that RM

might be

over

valued

FDI increases as Malaysias

political and financial sector

becomes more stable

Global

recessi

on


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Inflation Lost ofcurrency value

1950 2050INFLATION SIMPLYEXPLAINED.

SAME PRODUCT COST

MORE ..

THAT IS INFLATION


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2050(RM/USD)

Cost of living

HOW DOES MARKET

BALANCES THIS?

WHEN INFLATION

OCCURS :

Price of good go up

(Same goods will

cost more to buy)

Cost of living goes

high


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2050

Cost of living

becomes normal

Demand

COG HOW DOES MARKET

BALANCES THIS?

EFFECT OF INFLATION:

Demand for the

goods reduce

eventually pushing

the price down

This will at an

equilibrium state

bring down the

inflation


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Inflation GDP Vs Inflation

InflationHelps GDP

Inflation

worsens GDP

Source from : BNM

Beyond a certain

threshold inflation is

harmful for economy

Threshold observed

is 1-3% (for industrialcountries & 711% for

emerging markets)


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Inflation Effect of InflationSource from : Asian Development Bank (ADB)

Malaysia Inflation rate is comparable in

comparison to emerging countries


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Import & Export heart of GDP


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NX

(Net)Net Export Net Import

GDP (Generally)

GDP (Generally)


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NX

(Net)Net Export Net Import

GDP (Generally)

GDP (Generally)

FX changes impact


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Import & Export heart of GDPSource from : BNM

Weaker

RM

pushes

export

higher

Weaker

RM

pushes

import

lower

Direct relation between

Foreign exchange and

Export could not be seen.

OTHER FACTORS MIGHT

BE INFLUENCING THIS

Direct relation between

Foreign exchange and Import

could not be seen.

OTHER FACTORS MIGHT BE

INFLUENCING THIS


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1

2

3

4

5

6

7

8

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


Yen USD GBP

Malaysian trade (export)

0

2

4

6

8

10

12

14

(%Revenue)

Malaysia's taxes on Int. trade (% revenue)

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

Annual%

Year

GDP Parameters

Foreign direct investment, net inflows (% of GDP)

GDP growth (annual %)

Inflation, GDP deflator (annual %)


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What is Foreign Exchange

changes?


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How do you manage it?

F ig E h g t


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Foreign Exchange one countrys

currency value / another country

FOREIGN EXCHANGE is the

conversion of one countrys

currency into that of another

In free economy a countrys

currency is valued according to

the factor of supply and demand

F ig E h g t


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Foreign Exchange one countrys

currency value / another country

Major Currencies

USD EURO YEN POUND

?Major economic activities happens

H d g F ig


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How do you manage Foreign

Exchange?

It is amazing that a country, which consumes much more than it produces,

imports a lot more than it exports, saves so little and spends so much, and is

mired in deep imbalances of sorts, can have a currency so strong. That country

is none other than the UNITED STATES, and the currency, of course, is the

greenback

Emeritus Professor Datuk Dr Mohamed Ariff(Executive director of MIER)

Base on the above statement, if you manage RM/USD, everything else

interrelates


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How do you manage Foreign Exchange ?

Managed Float

Free Float

Fixed

Pegged

Fixed to the foreign currency. Backed one to one by

foreign reserves

Pegged to some band or value (either fixed or

periodic adjustment)

Control floating with intervention from

Central Bank

Free Floating according to SUPPLY AND

DEMAND


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But wait.

What makes it fluctuate?


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Nothing more than DEMAND & SUPPLY


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Foreign Exchange fluctuations

Demand & Supply triggered by :

1. Inflation

2. Interest Rate3. Government

Intervention

4. Political stability5. Speculation

There is no one supreme FX regime.

Every regime has its pro and cons


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PART I : SUMMARY

EconomyFX rateCause

Factors ofEconomy

1. BOP2. FDI3. INFLATION4. IMPORT &

EXPORT

4 Regimes of FXcontrol

1. FIXED2. PEGGED3. MANAGED

FLOAT4. FREE FLOAT

1. INFLATION2. INT. RATE3. GOVERNT

INTERVENTN4. POLITICAL

STABILITY5. SPECULATIO

N


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What can we learn from the

Currency effect of the PAST?


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LESSON from Asian

Financial Crisis97 98


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Asian Financial Crisis A walk thru

Speculation

Vs USD


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Asian Financial Crisis Impact

IMPACT

KLSE1300 pts

300 pts

97 98

FACTS that we know:1. Malaysia refused IMFs

assistance2. Malaysia recovered as quickly as

other countries with IMFsassistance

FACTS that we DONT know:1. Malaysia followed steps that were

taken by IMFs with other crisis hitcountries

2. Malaysias recovery werecushioned by USA MNCs(exporting electronics in

preparation for Y2K)


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Asian Financial Crisis Action taken

Speculation

Vs USD

1stPhase

(Stabilization)

2nd Phase

(Reform)

DANAHARTA formed

(Purchase NPLs)

DANAMODAL formed

(Recapitalize Financial Institution)

CORPORATE SECTOR restructure

FINANCIAL INSTITUTION merger

BOND MARKET development

NPL - RM23.1b

FI - RM 6.0b

58 banks 6

bankg group

98 05 05 - Now

RM/USD Pegged : 3.80 Managed Float

Provides tradestability


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Asian Financial Crisis Results


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Where are we now?

Is it EFFECTIVE?

Current status FX (Managed Float)


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Current status FX(Managed Float)

Government intervention

Monetary policy

Main tool used in modifying the amount of base money

in circulation by buying or selling Financial assets

T

YPES

Inflation

targeting

Price level

targeting

Monetary

targeting

Fixed Exchange

Rate

Gold

Standard

Mixed

Policy

Keep inflation under desired range (eg: benchmark

against CPI)

Similar to above except CPI growth in one year is

offset in subsequent years to reach a target price level

Maintain a constant growth in money supply

Maintain a fixed exchange rate with foreign currency

Price of national currency measured in units of gold

bars

Manipulate interest rate to influence changes in

inflation and growth rate


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Much better than

98



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What should we do in the

FUTURE?


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Future Expectation

History as shown that one fixed MP is incompetent


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Future Expectation

Asian FC Global reces.

Should depend on situation.


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Future Expectation

Asian FC Global reces.

However, having control (MANAGED FLOAT) is always

GOOD than losing control


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Challenges Ahead

Foreign ExchangevolatilityAs long as Currency is traded in openmarket , volatility will exist

Optimum

monetary policy

Government is still in search for the best

optimum policy to insulate against the

above volatility

Having a single

regional currency

This is similar to EURO. Although this is

good, but the EURO crises teaches us

another lesson. Are we ready for this?

Diversifying trade

direction

We have moved from USA base export

to diversification. But there is still some

domination in trading country. Diversify.


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PATIENCE IN LISTENING

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