Currency movements have varying implications on competitiveness
and external trade, debt, and investment. Because of ringgit depreciation, Malaysia's
competitiveness has been enhanced after taking into account the combination of the
currencies of Malaysia's trading partners and correcting for inflation among the
countries. As shown in Figure 4, Malaysia's real effective exchange rate has
declined starting from July 1997. This means that Malaysian goods are relatively
cheaper and more competitive than its trading partners.
Real Effective Exchange Rate as at January 1997 to April 1998
The currency depreciation will generally help to improve the
balance in the current account. With cheaper ringgit, exports grow faster than imports,
which help to reduce the size of the current account deficit. For importers, an exchange
rate of RM4.00 to US$1 means that they now have to pay about 37.5 per cent more compared
to pre-July 1997 when the exchange rate was at RM2.50.
On the part of exporters, the depreciation of the ringgit has
given an export boost to Malaysian products. When compared with the previous year,
the value of exports in 1997 grew by 12.4 per cent in ringgit terms, but only 0.5
per cent in USD terms. Compared with the corresponding period in 1997, export growth
for April 1998 grew by 44.5 per cent in ringgit terms. However, if the exchange rate
of RM3.732 to US$1 is used, the export growth for April 1998 fell by -3.1 per cent.
About 60-80 per cent of the inputs for these industries is imported. In 1997, imports
grew by 12.0 per cent in ringgit terms and 0.2 per cent in USD terms.
The exports from the manufacturing sector are largely from
non-resource based industries and contribute 80 per cent of total exports. The feedback
from the private sector suggests that there are limits to the beneficial effect of
a devalued currency on manufactured exports. Many firms are already operating at
full capacity and cannot increase exports quickly to take advantage of the depreciating
ringgit. Typically, there is a time lag before the beneficial effects of the currency
depreciation trickle down to the real economy. In addition, importers overseas are
pressing Malaysian exporters for discounts so that the value of exports is reduced.
The cost of imports, which go into manufactured exports, has also increased substantially,
and this can result in a subdued improvement in the current account.
In terms of primary commodities, there was little effect on
the ringgit depreciation on rubber prices since they are quoted in ringgit. Rubber
prices (RSS1) rose slightly from 279.3 sen per kg. in June 1997 to 287.3 sen per
kg. in April 1998 due to exporters adjusting the upwards since this increment would
be negligible in US dollar terms.
On the other hand, palm oil price is quoted in US dollars and
had risen significantly from RM1,215 per tonne in June 1997 to RM2,366 per tonne
in April 1998 with strong world demand for vegetable oils and the export ban on palm
oil by Indonesia since January 1998. The prices of logs and sawn timber are on the
downward trend due to falling demand in Japan and the continued anti-tropical wood
sentiment in Europe.
The ringgit depreciation has varying effect on rubber products.
Dry rubber-based industries, such as rubber tyres and footwear, have been adversely
affected because they have high import content and oriented to the domestic market.
However, latex-based products, such as gloves, condoms and catheters, that use local
materials and sold in US dollars have benefited.
The furniture industry is enjoying high profits because the
export prices are quoted in US dollars and 80 per cent of the materials are obtained
from local sources.
The sectors heavily dependent on imported machinery and materials
are worst hit by currency depreciation. The civil engineering subsector, which uses
imported materials and heavy machinery equipment priced in US dollars for infrastructure
development, is burdened by higher cost of repayment and interests of over 50 per
cent with the depreciation of the ringgit. In the case of cement production, the
higher cost of imported inputs, such as coal, gypsum, and other raw materials, will
increase production costs by RM180 million based on the exchange rate of RM4.00 to
Impacts of Depreciation
There are also other impacts of worsening exchange rates. They
include the following:
- Increase in domestic prices as a result of rising costs of imported intermediate goods. Rising consumer
prices will also cause real household income and real wages to fall.
- Proportionate increase in the value of
external debt exposure for foreign debts denominated
in foreign currencies. At the end of April 1998, the Federal Governmentís external
debts amounted to RM11.3 billion. However, if the same amount of external debts were
calculated on the basis of the exchange rate before the depreciation in mid-1997,
they would amount to RM8.6 billion. In other words, the ringgit depreciation increased
the Federal Governmentís foreign debt repayment by RM2.7 billion or 31.4 per cent.
- Deceleration in the growth of domestic
private investments as a result of exchange rate uncertainties,
low business confidence, and credit crunch.
- Economic growth rate will continue to worsen
if the exchange rates worsen or continue to remain unstable.