THE EFFECT OF THE CURRENCY DEPRECIATION TO THE MALAYSIA TRADE

By: # Hazman, Najib dan Shahrul

On 11^th November 2016, new  history was made for Malaysia when the value of its currency Malaysia ringgit fell to its lowest level since the Asian financial crisis in 1998, when it traded at RM 4.53 compared to 1 US dollar.

Malaysia Ringgit was introduced on 12 June 1967 by Bank Negara Malaysia to replace the ringgit Malaya and Borneo, which has been widely used throughout the country before it. The depreciation of the ringgit has created anxiety and skepticism among Malaysians regarding the effectiveness of the role by the Bank in maintaining stability in Ringgit Malaysia which is the important thing to Malaysia's trade. 2. The downfall in Ringgit Malaysia can be said affect in two things of Malaysia's trade, there are positive effects and negative effects. This effect will be discussed in the next chapter.

Malaysia Ringgit Performance is typically measured by comparing the value of the US Dollar which is the currency that is currently widely used as a reserve currency in the international trading system to trade the world's major commodities such as crude oil and gold. Performance of Malaysia Ringgit against the US Dollar can be seen in Table 1 below:

Table 1 : Value of Ringgit Malaysia (RM) against One U.S. Dollar (USD)

Source : Indexmundi.com and Investing.com

In 1980, RM has reached its highest of level in the history of its publication when it was trading at the level of RM2.18 for 1 USD. For  1998, RM was reached the lowest in history, it was traded at the level of RM 4.80 for 1 USD. Once again the history was made, on the morning of 11^th November 2016 when it traded at RM 4.53 compared to 1 US dollar, the lowest level since the Asian financial crisis in 1998.

The depreciation of the currency can be defined as the loss of value of a country's currency relative to one or more currencies of other countries in a period of time. There are variety of causes that lead to  the depreciation of the currency  of Malaysia Ringgit against the US Dollar.
8. There are, offshore speculation, the decline in commodity prices such as crude oil, the strengthening US currency and also due to lower currency China Yuan that made by China government (Mohammad Najib Abdul Razak , 2015).

The drop in the Malaysian ringgit to trade can be seen from the positive side, an increase in exports. Upon the occurrence of depreciation RM, then this will result in an increase in total exports. Second, the increase in foreign tourist spending in Malaysia. This happened because the people from foreign countries, especially from developed countries to see the RM cheaper than ever before. finally, it increases the number of foreign tourists to Malaysia.

The effect of the fall of the Malaysian ringgit to trade can be seen from the positive side, it’s increase a exports. During of depreciation of RM, thus its cause an increase total of exports of Malaysia. Second, its increase in foreign tourist that spending in Malaysia. This matter happens because people from foreign countries, especially from developed countries see  RM cheaper than before, finally it increases the number of foreign tourists come to Malaysia.

Table 2 : Total Export of Malaysia from 2009-2016

                                                                                                 

Source : Jabatan Perangkaan Malaysia (DOSM)

The effect of the downfall of the RM also can be seen from the negative side, it is lead the decline of imports. This is because import goods are sold in Malaysia are more expensive, its cause Malaysia will produce more value for money, to pay the price of the goods, this is because the value of the Malaysia Ringgit decline.

Table 3 : Performance of Malaysia

Source : Jabatan Perangkaan Malaysia (DOSM)

The next negative impact , that is an increase in inflation. Inflation occurs when the price of  import goods more expensive, and it will increase the cost of imports, thus its cause  demand  pull inflation happened.
 

Table 4 : Consumer Price Index (CPI)

Source: Jabatan Perangkaan Malaysia (DOSM) and Bank Negara Malaysia

Last but not least, it is increase Malaysia’s external debt.  Malaysia's external debt increased by 11.5% in 2015, due to the impact of  assessment of the depreciation of the ringgit against most currencies in the first three quarters of the year.

Table 5 : Outstanding External Debt (End Of Period)

Source : Kementerian Kewangan Malaysia (MOF) dan Bank Negara Malaysia

In conclusion, there are a variety of causes that lead to the depreciation of the Malaysia Ringgit. Some of them because, offshore speculation, the decline in commodity prices such as crude oil, the strengthening of US currency and also due to the actions of the Chinese government lowered the currency of Yuan. The fall in Ringgit Malaysia has a fairly significant impact on Malaysia's trade. On the positive side, the downfall of the Malaysia Ringgit can be said as grace because it’s due to Malaysia's total exports and the number of tourist arrivals to Malaysia increased and it’s enabling Malaysia’s dream of a better economic growth. From the negative side, the downfall of the ringgit can be said as the disaster because this is due to inflation rate, the total external debt increased, thus this lead to vacillation regarding the sustainability of reputation of companies in Malaysia in face of rising foreign debt.  As a full of hope, the depreciation of the ringgit against the US Dollar is only temporary and its value will be recovered in the future.