The Crisis and Policy Response

National Economic Recovery Plan
Chapter 1


Effects of thee Crisis

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.

 Figure 4

Real Effective Exchange Rate as at January 1997 to April 1998

  • Trade Balance

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.

  • Manufacturing Exports

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.

  • Primary Commodities

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.

  • Imported Inputs

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 US$1.

  • Other Impacts of Depreciation

There are also other impacts of worsening exchange rates. They include the following:

  1. 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.

  2. 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.

  3. Deceleration in the growth of domestic private investments as a result of exchange rate uncertainties, low business confidence, and credit crunch.

  4. Economic growth rate will continue to worsen if the exchange rates worsen or continue to remain unstable.




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