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8/3/2019 Final Darft (Send)
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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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BOPCountrysAccount statement
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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BOPCountrysAccount statement
BOP
Current Account
Capital Account
Financial AccountBalance of
Trade
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BOPCountrysAccount statement
BOP
Current Account
Capital Account
Financial AccountFX changes
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BOPCountrysAccount statement
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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BOPCountrysAccount statement
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
merchandise exports)
Agricultural raw materials
exports (% of
merchandise exports)
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
RM Vs Other Currencies
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
merchandise imports)
Agricultural raw materials
imports (% of
merchandise imports)
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 Capital inflowto country
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 Capital inflowto country
FDI
FX Exchange
Political & Social
LaborDONT
FAVOU
R
FAV
OURS
RM weakens
RM strengthens
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FDI Capital inflowto country
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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Inflation Lost ofcurrency value
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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Inflation Lost ofcurrency value
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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Import & Export heart of GDP
NX
(Net)Net Export Net Import
GDP (Generally)
GDP (Generally)
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Import & Export heart of GDP
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
RM Vs Other Currencies
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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Current status FX(Managed Float)
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Much better than
98
Current status FX(Managed Float)
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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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THANK YOU FOR YOUR
PATIENCE IN LISTENING