Factors that influences movement of ringgit Malaysia
https://ilokabenneth.blogspot.com/2014/09/factors-that-influences-movement-of.html
Author: Iloka Benneth Chiemelie
Published: 22-September-2014
Abstract
In
recent times, Malaysia has been a victim of numerous economic crisis such as
the 1998 Asian crisis and the 2008 global crisis. The main reason for this is
because Malaysia has such an open economy that is linked and interworking with
other global economies. One of the main reason for such an interlinking nature
is because the Malaysian economy is dependent on goods imported from other
economies as well as exporting to other economies in order to survive. Thus,
this research was developed to understand the factors that influence the
movement (valuation) of the Malaysian ringgit. Such an understanding will be
used to enhance policy making by guiding policy maker on variables to regulate
and how to regulate them. Findings from this research point fingers to FDI, GDP
and inflation rate as the factors that influences the movement of the Malaysian
ringgit. The influence in movement can be either an upward or downward movement
depending on how such factors are defined and the extent at which it influences
the movement of the Malaysian ringgit.
CHAPTER ONE
INTRODUCTION
In
this research, the researcher seeks to explore “factors that does have an
influence on the movement of Ringgit Malaysia.” In this introduction, the
researcher will lay emphasis on discussing the background of the study and such
include: the statement of problems, research objectives, research questions,
statement of research hypothesis, theoretical framework, scope of study, and
the limitation that the researcher will face in the course of the research. This
research is made up of five chapters as introduction, review of literature,
research methodology, analysis of findings, and conclusion.
Exchange
rate is one of the most vital elements when it comes to determining the
relative level of economic health that a country possess, and it plays crucial
role in country’s trade level, which is very important in a free market
economy. As such, it is one of the most monitored, analyzed and governmentally
manipulated economics measure in any given country. Same goes to Ringgit
Malaysia with numerous factors influencing its movement. However, discussions
in this research will be focused on factors that influence such movements as
Inflation Rate, Foreign Direct Investments (FDI) and Gross Domestic Products
(GDP).
1.2 BACKGROUND OF
STUDY
1.2.1 OVERVIEW OF RINGGIT MALAYSIA
In
Malaysia, the Ringgit is sometimes referred to as the “dollar” because it is
the old name that it was previously identified with. Additionally, the
currencies of Singapore (dollar) and Brunei (dollar) as also referred to as
“Ringgit” because that is the meaning of in Malay language (Chin Lee and Chee-Hong Law, 2013). Thus, this is why
the abbreviation “RM” is used to identify “Ringgit Malaysia.” The Malaysian
Ringgit is divided into 100 sen with denominations for coins in 1 sen, 5 sen,
10 sen, 20 sen, 50 sen and RM1. Denominations for banknotes are RM1, RM5, RM10,
RM20, RM50, RM100, RM500 and RM1, 000.
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 (Chin Lee and Chee-Hong Law, 2013).
During
World War II, the Japanese invaded that Malaysian capital of Kuala Lumpur, but
surrendered on September 13, 1945. The Federation of Malaysia was established
in 1963. Currency controls were introduced in 1986 to stabilize the economy and
prevent currency speculation (Chin Lee and Chee-Hong
Law, 2013). Controls were lifted for non-residents in 1999. In 2005,
Malaysia rescinded a 7-year-old policy of pegging the ringgit to the U.S.
dollar, instead opting for a peg to a basket of currencies. The exact
composition of the basket is a supposedly well-guarded secret to prevent
unwanted speculation by currency traders.
Today,
Malaysia is an important trading partner with the United States, and is one of
the world’s largest exporters of semiconductor devices, electronics and
appliances. Malaysia also exports a significant amount of oil and liquefied
natural gas to other Asian countries (Chin Lee and
Chee-Hong Law, 2013).
In
year 1990 to year 1996, Malaysia experienced a boost in economy. Most of the
citizens are making money from Malaysian capital market during the time.
However, when Malaysia was hit by an economic recession in mid-1997, most of
Malaysian experienced a great shock which were not really prepared to face the
uninvited catastrophe. Ringgit was badly affected. For a moment many economists
came out to discuss the reason behind the disaster. Majority pointed out the
blame to the world famous speculator - George Soros, who is said to be a major
contributor to the Malaysian economic muddle. In contrast, according to the Kwan and Yoonbai Kim (2004), claimed that exchange
rate rigidity was one of the factors of the 1997 financial crisis. They blame
the dollar-peg policy of most East Asian countries that had inevitably led to
their loss of competitiveness in international markets and susceptibly led to
speculative attacks as the US dollar continued to appreciate against western
European currencies and the Japanese yen for a few years before the crisis.
The
Malaysian Institute of Economic Research (MIER), Governor Central Bank of
Malaysia, Y.M. Tan Sri Dato' Ungku Dr. Zeti Akhtar binti Ungku Abdul Aziz said
that, the dollar was at US$124 to the euro in year 2004, down by 16 percent
compared to US$106.7 a year before. Due to the shrinking in dollar, ringgit
undervalued by 15 to 20 percent. During January 2003 to January 2004, the
ringgit weakens by 17.9 percent against the euro and 10.2 percent against the
yen and had also depreciated against some other major currencies (Baharumshah et al., 2002).
According
to Corsetti et al. (1998), Thailand, which has
had the weakest economic fundamentals in the region, started to experience
severe speculative pressure on the Thai baht before July 1997. After the bath
started to depreciate, Malaysian ringgit, Indonesian rupiah and the Philippines
peso also came under the same pressure. These three countries are said to have
the same economic fundamentals and export structure as Thailand. From January
to the end of October 1997, the baht had depreciated by 55 percent relative to
the US dollar. Same goes to Indonesian rupiah, Malaysian ringgit, the
Philippines peso and the South Korean won, where they fell by 54 percent, 34
percent, 33 percent and 14 percent respectively. In the same paper, Corsetti et al. (1998), assert that, the combined
effective devaluation for the currencies of the Thailand, Malaysia, Indonesia,
the Philippines and South Korea had a strong negative impact on the other
countries in the region like Taiwan, Hong Kong and Singapore. By early 1998,
the appreciation of the US dollar relative to the Thai baht had reached 78
percent, Malaysian ringgit and the Philippines peso both reached 52 percent,
South Korean won 107 percent and Indonesian rupiah 15 1 percent.
In
that period, which was under the governmental of Tun Mahathir Mohamed, before
the financial crisis occurred, the Ringgit Malaysia has a good position which
it can be exchange by RM2.80/1 USD. It is the best exchange rate till now but
nowadays, it is something that impossible to achieve it. The Asian currency
crisis of 1997 is still fresh in the mind of investors but curiously, there is
still not a clear consensus on the causes of the crisis. But the latest news
according to the Business Times on Saturday, January 15, 2011 said that the
ringgit slipped against the US dollar on light profit-taking after hitting
almost a 14-year high of 3.052 (Chin Lee and Chee-Hong
Law, 2013). In addition, the ringgit closed at 3.0535/0575 against the
US dollar compared with 3.0520/0560 on Thursday, January 13, 2011. It shows the
movement of Ringgit Malaysia became appreciated year by year. Besides that, it
also gives the good signal of the economy in Malaysia which it is in stability.
The
star online, April 24, 2010 noted that in a nominal terms, ringgit Malaysia did
appreciate to about 6.7% in the same year-to-date against the US dollars.
Presently, the ringgit is on a two-year high against the greenback at 3.19 when
compared with the 3.42 recorded at the start of the year and 2009’s peak which
was 3.72 as recorded in March. When measured against the British Pounds, the
ringgit has also strengthened from 5.5 to 4.9 in the year. There are also noted
rise against the euro from 4.88 to about 4.28 at the moment.
Numerous
researches have been conducted on understanding the relationship between Ringgit
Malaysia and the other currencies. The Ringgit Malaysia stands as the dependent
variable while the US Dollar, Thai Bath, and Yen being the independent variable.
There were usually study about the significant of the currency, but for this
study, the researcher would like to focus on the factors that influence
movement of the Ringgit Malaysia such as the Foreign Direct Investment (FDI),
Gross Domestic Product (GDP), and the inflation rate.
1.3 PROBLEM STATEMENT
Presently,
Malaysia is still feeling the impact of the 2008 recession which occurred in
the Asia region and the impact is still being felt as result of sup-prime
mortgage crisis experienced in the US which had its way into the global banking
crisis, the global inflation phenomenon experienced in food prices and volatile
commodity prices, and also the issues of currencies fluctuations that are
presently gaining high relevance. In any case, these issues are no longer a
surprise as a result of the increased hardship which the country went through
in the course of the Asian Financial Crisis experienced of 1997/98 – and this
recession was basically due to speculative activities in the hedge funds had a
back firing impact by making the currency to become extremely volatile. It is
also important that Malaysia has adopted a number of measured in order to
eliminate or at least limit the impact of these speculative effects on its
currency and such include the abolishing of offshore trading of the Ringgit
Malaysia on 1st of September 1998. This decision was made by the then Prime
Minister in a bid to internalize its Ringgit and limit the impact that foreign currencies
can have on it. As such, the researcher will also seek to understand how the
movement of other currnecies (exchange rante) influence the movement of the
Malaysian ringgit, which is part of the researcher purpose identified in this
research.
1.4. RESEARCH QUESTIONS
1.4.1
Is the movement of the Malaysian Ringgit
influenced by Gross Domestic Products?
1.4.2
Is the movement of the Malaysian Ringgit
influenced by Foreign Direct Investments?
1.4.3
Is the movement of the Malaysian ringgit
influenced by inflation rate?
1.4.4
To what extent does the influential
factors determine the movement of the Malaysian ringgit?
1.5. RESEARCH OBJECTIVE
In line with the stated research questions above, the
objectievs of this research are centered on:
1.
To
present historical analysis of the movement of Malaysian ringgit.
2.
To
undrstand the factors that influences the movement of the Malaysian ringgit.
3.
To
analyze whether FDI, GDP and inflation rates does have an influence on the
movement of malaysian ringgit.
4.
To
present recommendations on ways that the influential factors can either be
enhanced or mitigated.
1.6 THEORITICAL FRAMEWORK
INDEPENDENT
VARIABLE
1.7 HYPOTHESIS
1.7.1 HYPOTHESIS 1
H0:
There is no significant relationship between foreign direct investment and
movement of Ringgit Malaysia.
H1:
There is significant relationship between foreign direct investment and
movement of Ringgit Malaysia.
1.7.2. HYPOTHESIS 2
H0:
There is no significant relationship between inflation rate and movement of
Ringgit Malaysia.
H2:
There is significant relationship between inflation rate and movement of
Ringgit Malaysia.
1.7.3 HYPOTHESIS 3
H0:
There is no significant relationship between gross domestic product and
movement of Ringgit Malaysia.
H3:
There is significant relationship between gross domestic product and movement
of Ringgit Malaysia.
1.8 SIGNIFICANCE OF
STUDY
Overall, this research is significant for a number of
reasons centered on the understanding that it is developed to access and
analyze the factors that influences movement of Malaysian ringgit. Such an understanding
will have huge positive impacts on policy making and it is expected to be
beneficial to a number of people as:
Policy makers – this research is beneficial to policy
makers because it will provide them with concise understanding of the factors
that influence the movement of Malaysian ringgit and as such help enhance their
decision making process towards limiting decisions that enhances factors that
push the Malaysian ringgits downwards and enhancing decisions that ensure the
upward movement of Malaysian ringgit.
Academicians and researchers – this research will provide
advanced economic analysis on currency movement and it is beneficial to both
researchers and academicians because it will help to enhance their on factors
that influence movement of currencies with focus on the Malaysian ringgit as
well as help in the development of new researches related to the present one.
Besides the two highlighted beneficiaries above, this
research will also benefit to all readers because it will help enlighten them
on the Malaysian ringgit, its movement over the years as well an understanding
of factors that have influenced such movements.
1.9 SCOPE OF STUDY
The
factors influences the movement of Ringgit Malaysia as the dependent variable
while the inflation rate, gross domestic product (GDP) and the foreign direct
investment (FDI) as the independent variable. The scope of study in this
project paper is around 30 years. Data collected has found from 1979 to 2009.
30 samples will be use to regress it to investigated the relationship of every
independent variable toward the factors influenced the movement of Ringgit
Malaysia.
1.10 ORGANIZATION OF STUDY
Figure
1.1: organization of study
The
figure above shows how the whole research process will be organized and the
first chapter is the introduction which highlights what will be done and the
purpose of doing such. The second chapter presents analysis of relevant
literatures in the areas of the research topic. The third chapter is a
methodology of how the primary research will be conducted, and this is followed
by an analysis of findings from the primary research with conclusion coming in
as the final chapter.
CHAPTER
TWO
LITERATURE
REVIEW
2.1
FOREIGN DIRECT INVESTMENT (FDI)
Foreign
direct investments (FDIs) is one of the important variables that can be used to
determine the movement of Malaysian Ringgit. This is because FDI is increasing
becoming important when it comes to improving the economic growth and
employment rate of any given country as noted by Rahmah Ismail (2003) and Ishak
Yussof (2003).
Additionally,
FDI can be used to determine how growth of a country because higher income rate
does serve as a motivating factor for foreign firms to invest into the country
as they are confident of sales. In relation to past study conducted by Chowdhury
and Mavrotas (2005), findings reveal that two-directional causality established
between Gross Domestic Products (GDP) and FDI Malaysia was related to their
partnership with Thailand between the periods of 1969 to 2002.
On
the same hand, FDI has also been viewed as an important factor when it comes to
defining the economic growth that is experienced by majority of the developing
countries. For instance, the case of Malaysia shows that FDI does play a
significant role not just in stimulating economic growth of the country but
also towards offering significant contribution toward the growth of individual
sectors as well as towards transforming the economic structure of the country
from basic agriculture to a major producer and exporter of manufactured goods (Idris
Jajri, 2003).
Trade
Chakra takes another view and noted that foreign direct investment (FDI) can be
defined in its classic form as a companies from other country making some
physical investment towards building a factory in another country. It can be shortened
as the establishment of enterprise by foreign firms. On a more specific note,
it is the cross-border corporate governance mechanism through which a company
is able to obtain productive assets in another country. Such definitions can
also be extended to include investments that to include investments that are
made for the purpose o acquiring lasting interest in enterprises that operate
outside of the country of the investor.
The
process of FDI in Malaysia involves ensuring that at least 10% of the total
equity of the company’s shares are held by a non-resident investors. As such,
it can be said that transactions performed in the form of financial assets and
liabilities established between resident companies and non-resident investors
that are linked by a foreign direct investment relationship (FDIR) an also be
descried as FDI. Such transactions can be made between a Malaysian company with
another immediate or ultimate parent and fellow company from outside the
country.
Malaysia
has been recognized as one of the most successful Southeast Asian countries in
terms of attracting FDI. The country has also undertaken necessary actions to
ensure that it maintains the competitiveness of its FDI determinants such as
infrastructures and legal system in order to further attract new investors
while also retaining existing ones. In the course of ensuring such
effectiveness, the company has established numerous policy instruments to
support FDI. In present years, the Malaysian government has been successful in
improving the overall value of its FDI determinants and it also considering new
strategies that can be used to attract FDI.
Jerome
Swee-Hui Kueh, Chin-Hong Puah and Shazali Abu Mansor (2009) noted in their
study that income is the most important determinant of FDI from Germany
companies. Additionally, they made known that exchange rate is an important
factors for outflows of FDI from Singapore and Brazil. Additionally, low
interest rates have also been found to be capable of producing higher
tendencies of outward FDI. In essence, oversea investments need sound financial
support and abundance of capital in terms of low interest rate to enable firms
to access the capital market. S such, firms need to acquire the necessary
funding that they will use to finance their oversea investments, and this makes
exchange rate an important factor in the view of that. While it is ore likely
that countries with higher currencies will discourage exports as compared with
those with lower currencies, it should also be noted that this will lead to
higher propensity of oversea investment as the currencies begin to appreciate.
Marwah
and Takavoli (2004 made known that the elasticity of the estimated production
function in FDI is significant when explaining the economic growth of countries
studied. In actuality, the foreign capital elasticity was estimated to be 0.086
while import was estimated to be 0.443 in Malaysian growth rate. Thus, they
made the conclusion that both FDI and import does have significant influence on
economic growth of the country.
Ilhan
Ozturk & Huseyin Kalyoncu (2007) conducted an empirical study and found
that majority of the studies done in relation to the role of FDI in host
countries have played the suggestion that FDI is an important source of
capital, it helps in complementing domestic demands and private investments
which normally helps to create new job opportunities; enhance both the transfer
of technologies and spillover of human capitals and enhanced boost of the
overall economic growth of the host nation. In terms of developing countries,
micro-empirical studies that have been done on the relationship between FDI and
growth has shown that FDI has positive influence on overall economic growth of
the country but this is influenced by a number of factors like the trade
regime, human capital base obtainable in the host country, degree of openness
of the economy, banking systems and regulation of financial capitals.
Kirk
C. Heriot, John Theis and Noel D. Campbell (2008) also presented their own view
of firm and national links established between determinants and FDI. Their
study reveals that come of the researches done in this context link exchange
rate to positive FDI. In any case, it should be noted that all the studies
analyzed in this context are only for U.S based firms and data is on firm level
only. Studies on the influence of tax are mixed.
Blonigen's
further supports the importance of institutions when it comes to attracting
FDI. His study shows that trade effects does have mixed impact. In essence, extensive
trade protection can actually give rise to a more FDI that are used to avoid an
increase in protective rules and tariffs. This was referred to as “Tariff
Jumping FDI.” The trade flow can be for finished goods that are substituted for
a product that will be produced by an affiliate of a multinational enterprise
instead of the company itself or what Blonigen (2001) made know that they might
be intermediate products which are used by the affiliate to produce a finished
product. The first option has negative correlation with FDI, but the second
option has positive correlation with FDI.
2.2
GROSS DOMESTIC PRODUCT
A
Forex Journal published on 29 january 2011 at 1815 with the topic “Developing
Asia 2011” by Goeff Howei, shows that the growth of GDP outperformance has been
influenced by the International Monetary Fund, and current estimates have an
outperformance that is higher than initially though with 9.4% in Developing
Asia to 2.7% for the advanced economies. Looking ahead to 2011, the
outperformance theme is expected to continue with Developing Asia expected to
grow at 8.4% to 2.2% in the advanced economies.
As far as the region and financial markets are concerned, Developing
Asia comprises of India, China and the majority of Association of Southeast Asian
nations (ASEAN) territories. ASEAN encompasses Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
Strong
economic growth in developing Asia has influenced turnover of foreign exchange
and exchange has traded future with options for growth in the past couple of
years.
From
a Malaysian point of view, although the Ringgit appreciated by 8.5% into the
end of 2010, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI) spent
much of the ending periods in 2010 fluctuating around the 1500 range. Another
important key step from the same view is the all-time high of 1536, which seems
to demand the participation of the market, as estimated through open interest
before any significant test can be conducted. Malaysia has witnessed excessive
capital inflows as the KLCI open interests still remain at 20,000 lost, while
the volume of equity has been consistent instead of growing in the final four
months of 2010. In December of 2010, foreign reserves in USA stop at USD 105
billion.
Although
the growth of Malaysian GDP has been moderate at 5.3%, records show that
Malaysia’s appetite for imports has remain strong with domestic demand with
growth in important currently at 12.5% per annum. The microeconomics risk that
are expected to move into 2011 are the potentials for a snap election and
results which might have an impact on the growth of the private sector. While a
few debates have been performed in relation to the chances for the growth of
industrialization, one should be note that in terms of economic structure,
Malaysia still need to understand its private economic with the same degree
that the U.S needs to understand its labor markets.
This
was the main talking point in the Malaysian 2011 budget, and the following
quotes gathered from the Borneo post underlines what is to be done in the
future on industrialization in order to create sustainability in the real
economy – “a more entrepreneurial culture is the aim, with a high tech,
knowledge-based economy increasingly the basis of Malaysian business. This is seen as vital to moving the country
to the next income level and escaping the ‘middle-income trap,’ which tends to
lead to loss of competitiveness and foreign direct investment.” In terms of
other issues affecting the developing Asian countries such as Malaysia,
inflation and mitigation are amongst the high list as the overnight rates still
remain 2.75 pct with Consumer Price Index (CPI) growth recorded to be 2 pct in
the beginning of 2011. Another important key step for the Malaysian Ringgit is
how to offset the 3.07 low recorded in the November of 2010 (Geoff Howie, 2010).
Abdul
Latib Talib conducted an empirical study which pegged the Ringgit against the
US Dollars. An evaluation was conducted in the case of Malaysia and the
discovery is that exchange rate between regime choices and the economic growth
performance has not been established as of that time. It was also discovered
that the GDP is higher in the period of floated regime when compared with
growth rate of the pegged regime. The table 1 below shows that from 1991 to
1997 the GDP growth rate of the floated regime is estimated at 9.2% per annum
when compared with 2.9% experienced during the period of pegged regime.
During
the periods from 1997 to 1998 when Malaysia experienced unstable currency, the
economic growth of the country turned negative. Following the pegging of the
Ringgit in the third quarter of 1998, confidence was restored in investors and
it encouraged businesses to start expansion of their activities. Thus, the GDP
rebounded from 7.4% in 1998 to 6.1% in 1999. The same growth momentum continued
and the country ended up recording 8.5% growth in 2000. In any case, 2001 was a
period of mild recession as the Malaysian economy recorded a slowed growth of
0.3%. However, the economy recorded 4.1% and 5.8% growth in 2002 and 2003
respectively. Inflation rate also experienced the same directional movement as
the GDP growth. During the period of floated regime (1991-97), inflation rate
was 5.3% while inflation rate was 1.7% during the period of pegged exchange
rate regime (1999-2003). This is in support of the idea that inflation and
economic growth are normally lower when a country adopts pegged exchange rate
policy (Abdul Latib Talib, 2010).
Choong
Chee Keong (2005), Zulkornain Yusop (2005) and Venus Liew Khim Sen (2005) made
the discovery that exchange rate has an inconsistent coefficient with past
studies that have noted that positive relationship should be observed between
exchange rate (RM/USD) and the growth of an economy. From their own theoretical
view point, is the Malaysian ringgit experiences depreciations, the competitiveness
of the domestic commodities will be raised and export will also be encouraged
in the same time. On the same hand, appreciation of the Ringgit will also
influence exports. In any case, their finding from this study is that there is
a negative relationship established between depreciation and appreciation, with
conclusion that depreciating exchange rate will bring about slowed economic
growth.
The
above discussion can be linked back to the financial crisis experienced in East
Asia which started in the middle of 1997. Malaysian government successfully
devalued its currency in early 1990s in order to improve overall
competitiveness of export and to stimulate economic performance in the process.
However, this same policy did not work well following the 1997 East Asian
financial crisis because majority of the currencies in the East Asian countries
did depreciate during this period. During this critical period, depreciation
effects of a currency in one country might have induced contagion effects in
other countries within the region. Thus, depreciation can even create a worst
case for a country. This can be proven by observing the estimate coefficient of
Dummy Variable (DUM) which was negative at a significant level of 1%; a clear
sign that the crisis did lower down economic growth in the country.
Borensztein,
et al. (1998), Bengoa and Sancher-Robles (2003), Wang and Wong (2004), Marwah
and Tavakoli (2004), reviewed a number of studies conducted in relation to the
impact of foreign direct investment on the growth of economies has different
results in the forms of existence of an important relationship between economic
growth and foreign direct investment as well as the signs of such relationship.
Such studies can be grouped into two with the first category showing that FDI
does have a positive influence on economic growth while the second category
shows that FDI has a negative impact on economic growth as noted by Saltz
(1992), Bos, Sanders and Secchi (1974), Borensztein, De Gregorio and Lee
(1998), and Kawai (1994).
2.3
INFLATION RATE
Inflation
is described as an increase in the price of consumer goods and cost of living.
Some of the inflation are outcome of a country over printing money, while
others are experienced as a result of financial disaster with both causing the
currency of such country to plummet. Other causes of inflation include high
input or increase in the cost of transportation, gases and other factor that
makes it more expensive to distribute goods to stores. When the pleasure of
inflation becomes very high, retailers will normally pass the costs associated
with inflation to their consumers.
Wikipedia
defined inflation rate as a measure of inflation, which is seen as the extent
of an increase experience on consumer price index. This is the percentage rate
at which price level changes over the course of time.
Abdul
Latib Talib conducted a study in the past which pegged the Ringgit against the
US Dollar and an evaluation shows that inflation has moved in the same
direction as the GDP growth. Within the period that the regimen was floated
(1991-97), the study revealed that inflation rate was at 5.3% but it has 1.7%
rate during the period in which the regime was pegged (1999-2003). Thus, this
is in line with the ideology that inflation and economic growth are usually
lower during the period of pegged exchange rate policy.
Tobin
(1965) adopted a similar process and introduced money in a Solow-Swan model as
a form of an asset that can be substituted with capital. The implication is
that inflation does increase the opportunity cost incurred in holding money,
which is beneficial to accumulation of capital and enhanced growth in the
process. The works of Gomme (1993) does explain the effects of inflation by
adopting an endogenous growth model in a converse way. Take for instance a case
where money has been introduced in the budget constraint of a model of human
capital accumulation, one will notice that an increase in inflation rate does
have negative influence on both supply of laour and consumption which will lead
to decline in growth rate. De Gregorio (1993) illustrates that inflation can
have relevant influence on how physical wealth are accumulated. In this model,
money is viewed as a way of reducing the cost of transaction for both consumers
and firms because higher level of inflation introduced the necessary factor to
reduce holding of money and as such increase the cost of transaction while
generating negative effects on growth and investments. Past studies have also
moved to concede that there is a negative relationship established between
inflation and economic growth (Barro 1991; Fischer 1993).
Fischer
(1993) conducted a similar study to examine the potentials of non-linearity in
establishing relationship between inflation and economic growth by studying 93
countries. By making use of panel data and cross-section in a sample that
includes both industrialized and developing countries, the researcher
discovered that there is a negative relationship between inflation and growth. An
interesting discovery was made when the researcher made use of break points of
15% and 40% in spline regression and he discovered that the presence of
nonlinearities didn’t not just change the relationship existing between growth
and inflation, but it also shows that the strength of such relationship weakens
by 40% for inflation rates.
Sarel (1996) also conducted an empiric study
by making use of data from 87 counties within the periods of 1970-90 to test
the structural breakdown of relationship between inflation and growth and
discovered that the inflation does not have significant influence on growth for
structural breakdown that are lower than 8% of the annual inflation rates and
it can even show a marginally positive effects above that rate. Once that level
is bypassed, the effect where found to be negative, very strong and
statistically significant.
A
retrieval on 29 January 2011 at 1732, based on the trading economy noted that
the Malaysian inflation rate was last reported to be 2% in the November of
2010. The Malaysian inflation rate also averaged 2.77% from 2006-2010 with the
highest level recorded in July of 2008 at 8.50% and lowest level recoded in
July of 2009 at -2.40%.
It
is also possible to estimate the threshold level (structural break point) at
which the sign of relationship established between the two variables will
switch. This can be obtained by either defining a priority at the threshold for
different levels of inflation in the ad hoc manner Fischer 1993; Barrow 1995)
or by using a spline regression technique to directly estimate the threshold
rate of inflation (Sarel 1996; Ghosh and Philips 1998).
CHAPTER
3
RESEARCH
METHODOLOGY
3.1.
RESEARCH FRAMEWORK
Figure 3.1:
research framework
The
above figure (3.1) illustrates the variables developed for this research. In
order to understand factors that influence movement of Malaysian ringgit, the
FDI rate, GDP rate, and inflation rate will be tested as the independent
variables.
3.2.
DATA GATHERING
This
is a quantitative research. The essence of conducting a quantitative research
is because it allows for gathering of large data and the validity of a research
increased with a subsequent increase in the volume of data analyzed.
Quantitative research also allows for easy compressing of large data in a
summarized and easy to understand way. A total of 200 respondents participated
in this research and they comprise of both male and female respondents.
Majority of the respondents are Malaysians but a number of foreigners that
reside in Malaysia also participated in the research. The data gathering was
done with the aid of a questionnaire measured in likert’s 5-points rating
scale. Respondents were asked to choose between totally agreeing to a statement
(5) and totally disagreeing with a statement (1) while 3 represents a neutral
ground in which respondents neither agreed nor disagreed with a statement. The
questionnaire comprises of two sections with the first section designed to
gathered bio-data of respondents while the second section is the questions for
the research. Respondents for this research include university students and
working personnel. Responses where gathered by distributing the questionnaire
in the university premises and shopping malls.
3.3.
DATA ANALYSIS
Once
the data have been gathered, they were analyzed with the aid of IBM SPSS
statistical software. Data analysis include demographic variables, regression
analysis, reliability analysis, validity analysis, factor analysis, correlation
analysis and data computation analysis. The essence of all these analysis is to
validate claims that inflation rate, GDP growth rate, and FDI growth rate does
have an influence on the movement of Ringgit Malaysia.
3.4.
LIMITATIONS OF DATA GATHERING METHOD
In
the course of gathering data used for this research, a number of limitations
came to live due to the data gathering method adopted and they include:
3.4.1. Lack of trust on response
– since this is a technical research, it is expected that respondents should
understand the meaning of terms adopted in the research. However, the
researcher cannot validate that such is the case due to high volume of response
gathered. In any case, the researcher made respondents aware that they can seek
extra help with explaining the terms if they needed so.
CHAPTER
4
RESULT
ANALYSIS
4.1.
TEST OF RELIABILITY
In
any given research, understanding the reliability of gathered data is very
important because it is used as a direct measure of how reliable findings form
the research are. This is no difference in this research, and the reliability
is as demonstrated in the table below.
Table 4.1: Case Processing Summary
|
|||||
N
|
%
|
||||
Cases
|
Valid
|
200
|
100.0
|
||
Excludeda
|
0
|
.0
|
|||
Total
|
200
|
100.0
|
|||
a. Listwise deletion based
on all variables in the procedure.
|
|||||
Table 4.2: Reliability Statistics
|
|||||
Cronbach's Alpha
|
N of Items
|
||||
.862
|
22
|
||||
In
order to perform reliability test, Crombach develop a method known as Crombach’s
alpha in 1951, and this method has since then been adopted by researchers to
measure how reliable gathered data are. In the Crombach’s measurement, a data
is considered to be reliable if it obtains a value of at least 0.50, in which
the higher the value obtained, the higher the level of reliability. As can be
seen in the case of this research, the obtained value is 0.862, which makes the
gathered data highly reliable because the value is higher than the set standard
for testing reliability of gathered data as discussed earlier.
4.2.1. TWOSTEP CLUSTER
Figure 4.1: Twostep Cluster
In order to further test the reliability of the
data, a twostep cluster analysis was conducted as can be seen from the above
figure and finding from the analysis shows that the data is good as it crossed
the 0.5 margin. This is a clear indication that the gathered data are of high
quality, which further validates the importance of findings to be made from
this research because they can easily be applied in real sense.
4.3 DEMOGRAPHIC ANALYSIS
With the reliability of data already proven, this
research will proceed with the demographic analysis of gathered data.
Demographic analysis is very important because it allows the researcher to
understand how demographic variables have influenced the overall research
process and how findings from the research can be applied to demographic
variables.
Table 4.3: Gender of respondents
|
|||||
Frequency
|
Percent
|
Valid
Percent
|
Cumulative
Percent
|
||
Valid
|
Male
|
155
|
77.5
|
77.5
|
77.5
|
Female
|
45
|
22.5
|
22.5
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
From the
above analysis, it can be seen that majority of the respondents are male as
they represent 77.5% of the total response. However, females are also
significantly represented but the implication of the above understanding is
that majority of the findings from this research can potential be applied to
male views. In any case, it is important to note that this research will not
take such standards as it can lead to stereotyping, which means that findings
will be made applicable to all genders.
Table 4.4: Age of respondents
|
|||||
Frequency
|
Percent
|
Valid Percent
|
Cumulative Percent
|
||
Valid
|
18-30 years
|
26
|
13.0
|
13.0
|
13.0
|
31-40 years
|
108
|
54.0
|
54.0
|
67.0
|
|
41-50 years
|
35
|
17.5
|
17.5
|
84.5
|
|
51-60years
|
29
|
14.5
|
14.5
|
99.0
|
|
Above 60 years
|
2
|
1.0
|
1.0
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
Majority
of the respondents are aged between 31-40 years old, followed by those aged
41-60, then 18-30 and those aged above 60 coming in with the least
representation. The implication for this can be attributed to the fact that the
research focuses on working individuals because it is thought that they will
have a better understanding the research topic because terms used in this
context are very complex to a layman’s understanding.
Table 4.5: Race of respondents
|
|||||
Frequency
|
Percent
|
Valid
Percent
|
Cumulative
Percent
|
||
Valid
|
Malay
|
88
|
44.0
|
44.0
|
44.0
|
Chinese
|
36
|
18.0
|
18.0
|
62.0
|
|
Indian
|
45
|
22.5
|
22.5
|
84.5
|
|
Others
|
31
|
15.5
|
15.5
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
From the
above analysis, it can be seen that majority of the respondents are Malay as
they represent 44% of the total response, followed by Indians with 22.5%,
Chinese with 18%, and others with 15.5%. This is very much in line with the
Malaysian census figure in which Malays dominates and followed by both Indians
and Chinese. As such, the overall reliability of this research is further
validated with such understanding.
4.4. VARIABLE ANALYSIS
The
previous analysis focused on the demographics of the respondents, and this
section will seek to present an analysis of the variables loaded into the
research.
Table 4.6: Foreign direct investment in Malaysia
has increased in recent years.
|
|||||
Frequency
|
Percent
|
Valid Percent
|
Cumulative Percent
|
||
Valid
|
strongly disagree
|
18
|
9.0
|
9.0
|
9.0
|
Disagree
|
42
|
21.0
|
21.0
|
40.0
|
|
Neutral
|
28
|
14.0
|
14.0
|
54.0
|
|
Agree
|
71
|
35.5
|
35.5
|
89.5
|
|
strongly agree
|
41
|
20.5
|
20.5
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
Majority of the respondents (55.5%) agree that there
have been a subsequent increase in the volume of foreign direct investment in
present years as opposed to previous years. This is in line with earlier
understanding gained from the review of literatures, which has been attributed
to expressive and accommodating new government policies toward increasing
investments and creating employment.
Table 4.7: High level of foreign direct investment
moves the ringgit upward but low foreign direct investment moves the ringgit
downward.
|
|||||
Frequency
|
Percent
|
Valid Percent
|
Cumulative Percent
|
||
Valid
|
strongly disagree
|
21
|
10.5
|
10.5
|
10.5
|
Disagree
|
39
|
19.5
|
19.5
|
30.0
|
|
Neutral
|
21
|
10.5
|
10.5
|
40.5
|
|
Agree
|
74
|
37.0
|
37.0
|
87.5
|
|
strongly agree
|
45
|
22.5
|
22.5
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
In line with earlier understanding that foreign
direct investment in Malaysia has increased in recent years, majority of the
respondents (59.5%) agree that the movement of Malaysian ringgit is influenced
by foreign direct investment in which higher investment will move the ringgit
value upwards while lower investment will move the ringgit value downwards. The
implication is that one of the thesis has been validated with such
understanding as it is now clear that FDI does have influence on the movement
of the Malaysian ringgit.
Table 4.8: Increased GDP will bring about an
increase in the value of the ringgit
|
|||||
Frequency
|
Percent
|
Valid Percent
|
Cumulative Percent
|
||
Valid
|
strongly disagree
|
12
|
6.0
|
6.0
|
6.0
|
Disagree
|
24
|
12.0
|
12.0
|
18.0
|
|
Neutral
|
27
|
13.5
|
13.5
|
31.5
|
|
Agree
|
42
|
21.0
|
21.0
|
52.5
|
|
strongly agree
|
95
|
47.5
|
47.5
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
Besides FDI,
another variable that was loaded into this study is GDP, and it was made known
from the above table that respondents are of the view that higher level of GDP
will make the Malaysian ringgit stronger – which means that it will move the
ringgit upwards. 68.5% of the total respondents agree that in order for the
Malaysian ringgit to be made stronger, there is a need to increase the GDP,
which will increase both internal sales and export rate, and bring about a
higher valuation for the Malaysian ringgit.
Table 4.9: High level of inflation reduces purchase
and this moves ringgit downwards
|
|||||
Frequency
|
Percent
|
Valid Percent
|
Cumulative Percent
|
||
Valid
|
strongly disagree
|
19
|
9.5
|
9.5
|
9.5
|
Disagree
|
39
|
19.5
|
19.5
|
29.0
|
|
Neutral
|
6
|
3.0
|
3.0
|
32.0
|
|
Agree
|
92
|
46.0
|
46.0
|
78.0
|
|
strongly agree
|
44
|
22.0
|
22.0
|
100.0
|
|
Total
|
200
|
100.0
|
100.0
|
||
The
third variable loaded in this study is inflation, which is measured as the
extent at which increase in the price of a given commodity brings about
subsequent increase in the price of other commodities. From the above analysis,
it can be seen that a total of 68% of the respondents agree that high level of
inflation rate brings about downward movement of the Malaysian ringgit. This
implies that inflation rate does have an influence on the movement of the
Malaysian ringgit.
4.5.
MALAYSIAN RINGGIT MEASURED AGAINST MAJOR CURRENCIES
Figure 4:1: Malaysia Ringgit compared against
major currencies (2013-2014)
Source: Bank Negara (2014)
The chapter four begins with a comparative
view of the Malaysian Ringgit against other major currencies in order to
understand how the currency has performed within the last 12 calendar months.
Such understanding will be like a reflective review of how the Malaysian
ringgit has been performing in international market. From the above figure 4.1,
it can be seen that except for the US dollars, the Malaysian ringgit has
experience downward movement for all other currencies above with EURO having
the most visible downward movement. Basically, the implication is that the
Malaysian ringgit has underperformed in the course of the year being review and
now has lesser value to the currencies above as compared to its original value
before the years reviewed.
4.6 FACTORS THAT INFLUENCE MOVEMENT OF MALAYSIAN RINGGIT
Kamin and Roger (2000) are some of the
researchers that have conducted studies in the area of understanding how GDP of
a country does influence the exchange rate performance of its currency in the
international market. Their findings is based on the understanding that the
higher the GDP, the higher the currency because high GDP will increase the
country’s export capability with a subsequent positive influence on its
currency in the international business setting. This study also adopted similar
view by discussing the impact of the Malaysia GDP on movement of the ringgit in
the chapter two of this research.
Figure 4.1: Malaysia’s GDP annual growth rate
(2010-2014)
Source: Trading economics (2014 a) / Department
of Statistics Malaysia
By merely looking at the above figure, one
will see that the Malaysian GDP had a big downward plug in 2011 as compared
with the figure in 2010. The movement is so significant that the Malaysian
economy has been struggling to recover from it even after 3 years of big
fights. As it began to slowly recover from the plunge, it suffered a further
blow in 2013 as it fit low even further. However, there are great hopes that
the GDP growth rate will continue in its present positive movement because
since the 2013 flop, the GDP growth rate has remained steadily positive.
Figure 4.3: Movement of Malaysian ringgit
(USD exchange rate 2010-2014)
Source: Bloomberg (2014)
From the figure 4.3 above it is now evident
that the GDP does influence movement of Malaysian ringgit. This is because
during the period from 2010 to 2011 when the GDP growth experienced a sudden
plunge, the exchange value of the Malaysian ringgit also followed the same
downward direction. From the middle of 2011 to the middle of 2013 when the GDP
growth experienced some level of recovery, the exchange rate also followed the
same direction and moved upwards. The sharp downward movement in May of 2013 is
very much visible in both the figure 4.2 and 4.3, which are the GDP growth rate
and exchange rate value respectively. Since the May 2013 sudden plunge, both
graphs have experienced upward movement with slight downward fluctuation
movements visible in the same directions. Thus, it is concluded in this
research that the GDP growth rate of Malaysia does influence the movement of
the Malaysian ringgit in the sense that as the GDP growth increases, Malaysian ringgit
will move positively upward, and as the GDP decreases, Malaysian ringgit will
be pushed negatively downwards. Thus, increase in GDP will increase value of
the ringgit and vice versa.
Figure 4.4: Malaysian inflation rate
(2010-2014)
Source: Trading economics (2014 b) /
Department of Statistics Malaysia
Just like the movement noticed in the GDP,
there is a correlated movement between the exchange rate of the Malaysian
ringgit and inflation rate. Comparing figures 4.3 and 4.4, which represents the
exchange rate of movement of Malaysian ringgit and inflation rate in Malaysia
respectively will show wild similarities. This is because between the periods
of 2010 to ending of 2011 when the inflation rate was very high, the value of
Malaysian ringgit also plunged low. As the inflation rate started to reduce between
October 2011 and March 2012, the value of Malaysian ringgit also increased. The
sharp rise in inflation in January of 2013 is also visible in the value of
Malaysian ringgit a sit move further lower. Thus, it is concluded in this
research that inflation rate does have an influence on the movement of
Malaysian ringgit in the sense that the higher the inflation rate, the more negative
the Malaysian ringgit will move downwards the slope and the Malaysian ringgit
will also move positively upwards as the inflation rate starts to reduce. Thus,
increase in inflation rate will decrease the value of the Malaysian ringgit and
vice versa.
Figure 4.5: Rate of FDI in Malaysia
(2005-2013)
Source: Department of Statistics Malaysia
(2013)
Unlike the two other variables analyzed
above, it can be seen that the FDI has maintained an upward positive movement
since 2005 to 2013 analyzed in the above graph. Thus, it becomes easy to
conclude that the rate of FDI doesn’t influence the movement of Malaysian
ringgit. This is because between the period of 2010 and 2013 when the Malaysian
ringgit experienced heavy downward movement, the FDI rate still continued to
increase. One could be confused to conclude that the movement of Malaysian
ringgit influence rate of FDI in the sense that the more the ringgit devalues
the more the investment but such views should be countered with two contrasting
facts as to: 1) this research is not about the influence of ringgit movement on
FDI, instead it is about the opposite which is about the influence of FDI on movement of ringgit, which means that
contrasting views can emerge when viewed from different angles; and 2) the FDI
value still continued to increase irrespective of whether or not the Malaysian ringgit
moved upwards or downwards. Thus, it can be concluded that the movement of FDI
does not influence the movement of Malaysian ringgit.
4.5.
SUMMARY OF FINDINGS
From
the above analysis, evidence has no pointed out that the three variables (GDP,
FDI and Inflation rate) loaded in this research does influence the movement of
the Malaysian ringgit. The implication is that in order to ensure stability or
an upward movement, these variables need to be monitored and controlled in a
way that an upward movement will be ensured.
CHAPTER
5
CONCLUSION
AND RECOMMENDATION
From
the beginning of this research, the purpose was communicated as to gain an
understanding of the factors that influences the movement of the Malaysian
ringgit. With the purpose set, a background understanding was presented in
references to pas experiences. One of the major reference made is the 1998
Asian financial crisis, which was described as an outcome of numerous loopholes
in the Asian financial system. This crisis affected majority of the Asian
economies and Malaysian economy was one of the economies hit hardest. In order
to avoid future occurrence, the government has been successful in establishing a
number of economic policies but some of these policies now affect the overall
valuation of the Malaysia ringgit
Further
review of literatures was developed in order to support the ideas presented
above and the findings from literatures indicates that the level of FDI, GDP
growth, and inflation rate all have an influence on the movement of the
Malaysian ringgit. These literatures are also supported by empirical evidence
such as the case of Malaysians’ passion for imported brand, which has affected
GDP growth poorly and subsequently moved the Malaysian ringgit downwards.
In
line with these literatures, a research methodology was developed in order to
understand how the review literatures can be applied in the real world setting.
Findings form the primary research are in line with the literatures reviewed
because majority of the 200 respondents interviewed are of the general view
that FDI, GDP, and inflation rate all influence the movement of the Malaysian
ringgit. Movement in this case can be either positive (upward) or negative
(downward). As such, it is summarized in the chapter four that in order for
stability of the ringgit to be maintained or an upward movement assured, it is
necessary for these variables to be regulated in reference to how they influence
such positive movement.
Overall,
this reach has been greatly successful because the main objective has been
achieved and the findings from this research are in line with previous
findings, which makes it relatively positive. For future related research, it
is recommended that such researchers should focus more on the extent of
influence that each of these variables can have in order to determine the
variable that has the most significant influence when it comes to the movement
of the Malaysian ringgit. Such an understanding will go a long way in
supporting the discoveries made in this research, and present decision making
with more reflective guidelines on how to go about with policy making.
REFERENCES
Baharumshah, Ahmad Zubaidi & M. Masih, A. Mansur
& Azali, M., 2002. "The stock market and the ringgit exchange rate: a
note," Japan and the World Economy, Elsevier, vol. 14(4), pages 471-486,
December.
Corstting Giancarlo, Paulo Pesenti, and Nouriel
Roubini (1998), “Paper tigers? A model of the Asian crisis.” European Economic
Review forthcoming.
Hwee Kwan Chow & Yoonbai Kim, 2004. "The
Empirical Relationship Between Exchange Rates and Interest Rates in Post-Crisis
Asia," Working Papers 11-2004, Singapore Management University, School of
Economics.
Lee, Chin and Law, Chee-Hong (2013): The Effects of
Trade Openness on Malaysian Exchange Rate. Published in: International Economic
and Finance Journal , Vol. 8, No. 1 (2013): pp. 25-39.
APPENDIX
QUESTIONNAIRE
DESIGN
Instruction: we appreciate your decision
to participate in this research. This research is developed to understand how
empowerment in the workforce influences the performance of staffs and the
mediating role of employee appraisal. You are required to address each question
with utmost level of honesty in terms of how you personally feel about the
questions contained in this research.
Section A
Bio data of respondents
Gender:
Male: Female:
Race:
Malay
Indian
Chinese
Others
Age of respondents
18-30 years
31-40
years
41-50 years
51-60 years
Above 60 years
Section B
Research questions
Choose between 1-5, where 1 = strongly
disagree, 2 = disagree, 3 = neutral, 4 = agree, and 5 = strongly agree
|
1
|
2
|
3
|
4
|
5
|
Foreign direct investment in Malaysia has increased in recent years.
|
|||||
Foreign direct investment is important for development of Malaysian
economy
|
|||||
Foreign direct investment is important for employment and growth for
entrepreneurship.
|
|||||
High level of foreign direct investment moves the ringgit upward but
low foreign direct investment moves the ringgit downward.
|
|||||
I prefer imported brands to Malaysian brands
|
|||||
I am willing to pay more for imported brands
|
|||||
Imported brands influence movement of ringgit by making it move
downwards due to lack of investment on local brands.
|
|||||
Increased GDP will bring about an increase in the value of the
ringgit
|
|||||
Inflation rate in Malaysia is now higher than before
|
|||||
High level of inflation reduces purchase and this moves ringgit
downwards
|
|||||
Inflation needs to be reduced in order to increase the value of the
ringgit
|
|||||
Malaysian inflation is mainly caused by high petroleum and gas
price.
|
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