1.0 Introduction

In the last few decades exchange rate economics has seen a number of developments, with substantial contributions to both the theory and empirical research on exchange rate determination. Important developments in econometric and the increasingly large availability of high-quality data have also been responsible for stimulating the large amount of empirical work on exchange rates in this period (Retrieved from http://www.cambridge.org/uk/catalogue/catalogue.asp?isbn=0521485843).

Generally, foreign exchange market refer to market for converting the currency of one country into that of another. Intuitively, the foreign exchange market, also known as the FOREX market is important as it enables companies based in different countries that use different currencies to trade with each other. As the exchange rate concept and mechanisms are very crucial to a country, particularly in this era of globalization, where import and export are becoming more and more essential for a country’s economy and the citizen well-being, the impact of exchange rate movement to the Malaysia economy will be discussed. The paper is organized as follow: firstly, we will review literature on exchange rate topics, and then we will review the exchange rate policy in Malaysia. Then, we will try to analyze the exchange rate movement impact to the Malaysia industries and economy. Last but not least, we will then conclude the writing by summarizing the managerial impact to executives in dealing with the exchange rate movement.

2.0 Literature Review of Macroeconomic and Exchange Rate

Macroeconomics issues are very essential to both business executives and economists. Of this, the exchanger rate concept and movements catch many people attention in this era of globalization, where international trading and integration of the world business segments are increasing at a very fast pace. In trying to analyze the exchange rate policy for Malaysia, it is crucial if we review some of the theories and concept of the exchange rate and the relevant policy. The exchange rate policy is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors (Wikipedia).

Interestingly, there are many types of exchange rate policy. The basic types are:

(1) The floating exchange rate, where the market dictates the movements of the exchange rate supply and demand without the intervention of the government (Daniels et al., 2007),

(2) The pegged float, where the central bank keeps the rate from deviating too far from a target band or value, as a hybrid of fixed and flexible rates in which governments attempt to affect their exchange rates directly by buying or selling foreign currency or indirectly through monetary policy, by lowering or raising interest rates (Daniels et al., 2007), and

(3) The pegged exchange rate, which ties the currency to another currency, mostly more widespread currencies such as the U.S. dollar or the euro (Daniels et al., 2007).

Regarding this, it is worth to mention that, in the wake of the Asian crisis, many emerging market countries have adopted systems of managed floating. And a number of countries still maintain fixed exchange rates. History has shown that heavily managed or pegged exchange rate regimes can be tested suddenly by exchange markets, and that it can be very costly either to defend them or to exit under disorderly circumstances. Some researchers argue that, while such regimes can succeed, the requirements for a country to maintain a pegged or heavily managed exchange rate are daunting—especially when the country is strongly engaged with international capital markets. There is essentially no room for error. Countries opting for such a system must pursue, unwaveringly, sound macroeconomic policies, and also need to be fully aware of the associated costs, including the possibility that extraordinarily high interest rates might be required at times of severe financial market pressure. Moreover, their domestic financial institutions and businesses must be well prepared to live with such policy adjustments. Where there is doubt that these requirements will be met, a flexible exchange rate regime—one in which the rate moves both up and down in response to market forces, sometimes by significant amounts—is a better choice (http://www.mof.go.jp/english/asem/aseme03e1.htm).

There has been an ongoing debate on the appropriate exchange rate policy in developing countries. The debate focuses on the degree of fluctuations in the exchange rate in the face of internal and external shocks. Exchange rate fluctuations are likely, in turn, to determine economic performance. In judging the desirability of exchange rate fluctuations, it becomes, therefore, necessary to evaluate their effects on output growth and price inflation. Demand and supply channels determine these effects (http://165.194.73.110/newjed/full-text/29-1/04_J626_.PDF). In this writing, thus, we will discuss the exchange rate movement impact to the Malaysia economy and companies. Common sense, import and export can be very sensitive to the exchange rate, in which exports can become more expensive (cheaper) in the foreign currencies of the importing countries when the domestic (i.e., home) currency of the manufacturing strengthens (weakens) (McGuigan, Moyer, & Harris, 2002). Apart from that, exchange rate also influences key economic variables: example, inflation, unemployment rates, and standard of living. Some of the effect of change in a nation exchange rate can be on: the nation’s price level, distribution of real income, and standard of living (Thomas, 2006).

The relationship within money supply, interest rate, price level as well as exchange rate are pretty complicated, however, generally speaking, as outlined by Moss, 2007, increase in money supply with tend to cause interest rate to falls, exchange rate to depreciates, and price level to rises (which means, inflation). On the other hand, decrease in money supply will cause interest rate to rises, exchange rate to appreciates and price level to falls (that is, deflation). As government try to manage the exchange rate, three tools of monetary policy are used, namely: discount rate, reserve requirement, and open market operation. These three monetary tools will be able to affect the total money supply in the market, and thus, possibly affecting the other economic variables, such as exchange rate, inflation rate and inflation (i.e., price level).

3.0 The Currency of Malaysia

Country : Malaysia

Currency : Ringgit

Alias : Malaysian ringgit

ISO 4217 CODES : MYR/458

Symbol : RM

The ringgit is the national currency of the Federation of Malaysia, an alliance of former British colonies in Southeast Asia. The term means “jagged” in Malay, and refers to the serrated edges of Spanish silver dollars that were used throughout the East Indies in the 19th century. Malaysia’s central bank is known as Bank Negara Malaysia, and is responsible for all currency controls. As recently as 2005, the exchange rate of the ringgit was pegged directly to the U.S. dollar, but the peg has since been shifted to a “basket of currencies” model (Source: Bank Negara Malaysia).

4.0 The Economics Outlook of Malaysia

In September 1998, the Malaysian authorities launched a policy package designed to insulate monetary policy from external volatility. The exchange rate policy included an exchange rate pegged to the U.S. dollar and selected exchange and capital controls, complemented by a fiscal stimulus package that stepped up capital spending. These measures permitted the subsequent lowering of interest rates. The authorities also pursued fundamental reforms in the financial and corporate sectors, including a bank consolidation program and an upgrading of prudential regulation and supervision in line with international best practices.

Fortunately, Malaysia’s recovery in 1999–2000 was among the strongest of the Asian crisis economies, led by buoyant world demand for electronics and supported by accommodating macroeconomic policies. The external current account turned into large surpluses, allowing a buildup of international reserves. Unemployment declined, and inflation remained low. The strong growth and a gradual easing of capital controls helped improve investor confidence. The recovery was also accompanied by reduced vulnerability of the financial system. Although operational restructuring of the corporate sector has been somewhat slow, much progress was achieved with corporate debt restructuring.

However recently, since the latter part of 2000, however, downside risks for Malaysia have increased. Heavy dependence on electronic exports made Malaysia highly sensitive to the global slowdown in information technology. Sharp depreciations of the yen and other regional currencies have resulted in a large effective appreciation of the ringgit, particularly during late March and early April 2001, leading in turn to short-term capital outflows and reserve losses. This development, at a time when the economy was already being hit hard by the global slowdown, has adversely affected market confidence. Nevertheless, Malaysia’s external vulnerability is relatively well contained: the current account continues to maintain a large surplus; short-term external debt is low; and reserves have remained adequate. Progress in financial sector restructuring has also improved the capacity of banks to manage risks.

Looking ahead, the future will be concern to the issue is how Malaysia can better protect itself from future shocks and avoid another crisis while it seeks to regain its position as one of the fastest growing economies in the world (retrieved from http://www.imf.org/external/pubs/nft/op/207/index.htm#overview).

5.0 The Malaysia Exchange Rate Policy

On 21 July 2005, Bank Negara Malaysia announced the exchange rate of the ringgit with immediate effect will be allowed to operate in a managed float, with its value being determined by economic fundamentals. Bank Negara Malaysia will monitor the exchange rate against a currency basket to ensure that the exchange rate remains close to its fair value. Promoting stability of the exchange rate continues to be a primary objective of policy.

According to Bank Negara, changes in the international and regional financial and economic environment have made it important for Malaysia to have a stable exchange rate against its major trading partners, in particular, the regional countries. Consequently, the stability of the ringgit exchange rate against the regional currencies will become increasingly important. Such stability can best be achieved by maintaining the value of the ringgit against a trade-weighted index of Malaysia’s major trading partners. (BNM, retrieved from http://www.bnm.gov.my/index.php?ch=8&pg=14&ac=1054&print=1).

6.0 Impact of Currency Movement to Economy

As shown above, the exchange rate can have major influence to the economy as well as impact business decisions by executives which mainly dealing with import or export industry. The relationships of exchange rate with other economic variables, such as money supply, price level and interest rates are interrelated, but sometimes could be ambiguous and hard to predict. Ad Moss (2007) put it, the relationships we learn from theory could sometimes different from what we observed in the practical world, as this is due to the fact that these economic variables, are not only influence by economic fundamentals situations, but also by human, speculator or investor’s expectations. Worst, government are also consistently monitoring on these economic variables and adjust, or intervene, using monetary or fiscal policy to achieve a particular economic situation where they see relevant. It is ironic to even observe that, in the global arena, two governments can have different opinions on different exchange rate policy which are best to their country. This is true also as we could observe often, economists themselves do not come into consensus agreement with each other to if which policy is best.

Nevertheless, the key framework on the exchange rate movement: appreciation, depreciation or even re-evaluation could be having impact to the business environments and thus the entire economy prosperity of a nation should not be confused. Ceteris paribus, Malaysia currency appreciation will be bad for the exporter and good for importer. On the other hand, Malaysia currency depreciation against foreign currency is good for export and bad for import industry. The impact from changes in the exchange rate level could have differing income distribution effect to different group of industry players as well as the citizens. For example, as Malaysia is highly dependent on the electronic manufacturing industry, the appreciation to the Ringgit Malaysia will cause these industry players to suffer, when their products will be sold for high prices in the foreign market. This will cause the Malaysia electronic products to lose its competitiveness and attractiveness when compared to other countries, let say, Japan for example, if the Japan currency does not appreciate. As Malaysia export highly dependent on the electronic sector, government tax revenue could also be impaired. Workers in the sector could also be laid off if the various manufacturers close down their factory to cut costs, or choose to move to cheaper place to continue the manufacturing processes, such as China and Vietnam.

In contrast, if the Ringgit Malaysia appreciates, the other players which import good from foreign will prosper. For example, those retailer which import branded commodity such as shirts, jeans, bags, books or etc., will have the chance to import relatively more goods when the RM grows stronger. However, the selling price could just remain as the old price, and the importers, thus, could realize extra profit margin. These importers will also have a chance to reduce the selling price, which make these importers goods more appealing to buyers, and thus increase their market share or possibly revenue. Other possible benefited parties are those Multinational companies that have already borrowed a lot of debt from the foreigners. If RM appreciates, the effective interest rates applied to these borrowers will be reduced. For example, Telecom, prior to the currency appreciation in 2006, had borrowed many money from offshore. When RM appreciates, they gain when they are now just require to pay back less RM to fulfill the same interest or principal payment which are denominated in foreign currency.

However, the real impact to the overall economy is ambiguous, as the benefits to importers could be offset by the harm caused to the exporters. Government and consumers impact due to these offsetting effect are hard to predict.

7.0 Conclusion

To conclude, it is shown that the exchange rate in the context of macroeconomics is complex and interesting. There are many theories regarding the topic, and yet the exchange rate movement is sometimes so unpredictable. Governments, investors, speculators, and various business entities play an important role regarding this topic. For a developing country which is small such as Malaysia, the exchange rate could impact the entire country economy from many perspectives. It is also shown that the exchange rate movements have differing impact to different groups of people, in which some could be benefited from it while the others could be harmed by it. Managers, particularly those involving in the exporting or importing industry, should never take this topic for granted. They should plan earlier and be proactive in dealing with the possible changes in exchange rate.

8.0 References

Samuelson, P. A., & Nordhaus, W. D. (2005). Economics (18^th ed.). New York: McGraw Hill.

McGuigan, J. R., Moyer, R. C., & Harris, F. H. (2002). Managerial economics: applications, strategy and tactics. Ohio: South-Western Thomson Learning.

Thomas, L. B. (2006). Money, banking and financial markets. Ohio: South-Western Thomson Learning.

Daniels, J. D., Radebaugh, L. H., & Daniel, P. S. (2007). International business: environment and operations (18^th ed.). New Jersey: Prentice Hall.

Moss, D. A. (2007). A concise guide to macroeconomics: what managers, executives, and students need to know. Boston: Harvard Business School Press.