Factors Affecting the Exchange Rate of Malaysian Ringgit

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FACULTY OF ECONOMY AND MANAGEMENT

EPPM4433 INTERNATIONAL FINANCE

SEMESTER 2 SESSION 2017/2018

TOPIC:

FACTORS AFFECTING THE EXCHANGE RATE OF MALAYSIAN RINGGIT

PREPARED BY        :

LECTURER                 : DR. TEE LAIN TZE

SET                        : 2

TABLE OF CONTENTS

1.0 INTRODUCTION        2

1.1 BACKGROUND        2

1.2 PROBLEM STATEMENTS        3

1.3 OBJECTIVES OF THE PAPER        3

1.4 CONTRIBUTIONS OF THE PAPER        3

2.0 LITERATURE REVIEW        4

3.0 DATA AND METHODOLOGY        12

3.1 DATA COLLECTION        12

3.2 METHODOLOGY/DATA ANALYSIS        14

4.0 FINDINGS        14

4.1 INSPECT DESCRIPTIVE        14

4.2 INSPECT CORRELATIONS        15

4.3 MULTIPLE REGRESSION MODEL        16

5.0 CONCLUSION AND RECOMMENDATIONS        18

REFERENCES        20

APPENDICES        21

1.0        INTRODUCTION

1.1        BACKGROUND

Malaysia has been formed in 1963 and since its formation, Malaysia’s economic performance has been one of the best in Asia. Real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005. In the early 1980s through the mid-1990s, Malaysia reached a performance peaked with almost 8% rapid growth in economy annually. Besides, Malaysia also attained low inflation rate at about 3-4 percent per year. The unemployed rate was low and Malaysia became one of the miracle economies in East Asia. However, when the financial crisis emerged, these miracles went off. During the year 1997, there was drastic changes in Malaysia. This crisis originated from Thailand and Thai baht had suffered an intense selling pressure in May 1997. This onslaught had a domino-effect and finally affected our currency ringgit in Malaysia.  Foreign direct investment fell at an alarming rate and capital flowed out of the country. This causes the value of the ringgit depreciated from MYR 2.50 per USD to, at one point, MYR 4.80 per USD. After the controversial sacking of finance minister Anwar Ibrahim, a National Economic Action Council was formed to deal with the monetary crisis. Bank Negara imposed capital controls and pegged the Malaysian ringgit at 3.80 to the US dollar. This fixed exchange rate was then abandoned on 21 July 2005 in favour of a managed floating system within an hour of China announcing the same move. In the same week, the ringgit strengthened one percent against various major currencies and was expected to appreciate further.

From the economic history of Malaysia, we know that there are several macroeconomic factors that affect Malaysia’s foreign exchange rate. Each variable that would affect exchange rate of Malaysia took an important role in determining foreign exchange rate of Malaysian Ringgit. This paper is to investigate the factors that may affect the exchange rate of Malaysia and evaluate whether the factors have influenced on the foreign exchange rate of Malaysia. Hence, recommendations on ways that the influential factors can either be enhanced or mitigated are presented.

1.2        PROBLEM STATEMENTS

Since globalization, foreign exchange trading has become a method or opportunity for all the companies, traders as well as all individuals in an economic to gain profit. In relation to this, Malaysia is now a hot topic due to the sharp depreciation and devaluation in domestic currency, Malaysian Ringgit (MYR). In recent year, Malaysian Ringgit (MYR) has tremendously depreciated against Chinese Yuan (RMB). Therefore, this study is to understand how interest rate, inflation rate and export rate will affect exchange rate between Malaysian Ringgit (MYR) and Chinese Yuan (RMB).

1.3        OBJECTIVES OF THE PAPER

The objectives of this research are centered on:

1.        To investigate the factors that affect the exchange rate of Malaysian Ringgit.

2.        To evaluate the influences of interest rate (IR), inflation rate (INF) and export (EX) does have an influence on the exchange rate of Malaysian Ringgit (MYR).

3.        To present recommendations on ways that the influential factors can either be enhanced or mitigated.  

1.4        CONTRIBUTIONS OF THE PAPER

The aim of this study is to analyze and determine whether there is any significant relationship between the chosen factors and the exchange rate of Malaysian Ringgit against China Yuan. The independent variables in this study are interest rate, inflation rate and export while the dependent variable is the exchange rate. We use Malaysian Ringgit and Chinese Yuan (RM/¥) as the indicator of exchange rate in our research.

In this analysis, we will analyze the independent variables mentioned above by using multiple regression model with quarterly data obtained from Bank Negara, Department of Statistics, Malaysia and Malaysia External Trade Statistics from year 2008 to year 2017. The reliability and validity of the results of this study is further enhanced by literature review on various published articles and journals. Lastly, the outcome of this study may help researcher in further research regarding this topic.