FACULTY : FACULTY OF BUSINESS MANAGEMENT

PROGRAM : BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE

COURSE : INTERNATIONAL FINANCIAL MANAGEMENT (FIN542)

TITLE : MYR & EUR

GROUP : BA2423C
Table of Contents
HISTORY OF MALAYSIA AND EURO 1

SHORT TERM FORECAST 2

LONG TERM FORECAST 4

RELATIONSHIP BETWEEN SHORT TERM AND LONG TERM 9

RECOMMENDATIONS 10
1.0 HISTORY OF MALAYSIA RINGGIT

Malaysian Dollar (M$) and issued by Bank Negara Malaysia (Aziz, n.d.). By that time, UK
pounds sterling was the “official currency” in Malaysia foreign exchange market. However, on
23 June 1972, UK pounds sterling was floated, it cause Malaysian government decide to revalue
the Malaysia Dollar and then Malaysia authority decided changed the “official currency” to US$
instead of the UK£ (Talib, 2005). During August 1975, the Malaysia currency was legally
renamed from “Malaysian dollar” to “ringgit” according to the Malaysian Currency (Ringgit)
Act 1975 (BNM, 2015). However, even though the name of “ringgit” was officially accepted, the
currency of Malaysia was still referred to as dollar. This scene was being continued until year
1993 when the currency of Ringgit Malaysia (RM or MYR) was introduced to replace Malaysian
Dollar.

HISTORY OF EURO

The Euro currency was launched or introduced as an accounting currency on January 1, 1999.
The history of Euro started with the acceptance of the Maastricht Treaty. The history of Euro
begun with participating countries fixing their domestic currencies to the Euro. This event in the
history of Euro meant that local currencies were not allowed to fluctuate against the Euro and
against each other. When the history of Euro was started, Euro was launched merely as an
electronic currency. Euro as a cash currency did not become a legal tender until later, on 1th
January 2002.

Per history of Euro, originally twelve (12) of the 15 EU countries (Germany, France, Austria,
Spain, Portugal, Italy, Belgium, Luxembourg, the Netherlands, Finland, Greece and Ireland)
were members of the so-called Eurozone. Euro history tells us that these states were joined later
by Slovenia (2007), Cyprus (2008), Malta (2008), and Slovakia (2009).

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2.0 SHORT TERM FORECAST

Currency appreciation is an increase in the value of one currency in relation to another

currency. Currencies appreciate against each other for a variety of reasons, including government
policy, interest rates, trade balances and business cycles.

Euro currency started to appreciation from March 2014 to March 2015 which makes the
Malaysian Ringgit appreciate from RM4.3215/EUR to RM 3.963/EUR. This was happened due
to increase in inflation rate. The fall in the nominal euro effective exchange rate and inflation has
been slower in between March 2014 December 2014 which the data shows it fell by 5% Citi
have forecasted it has reached 8% by March 2015.

Next is the Currency depreciation is a fall in the value of a currency in a floating

2
exchange rate system. Currency depreciation can occur due to factors such as economic
fundamentals, interest rate differentials, political instability or risk aversion among investors.

Beginning from March to September 2015 the currency starts to depreciate from RM
4.0379 /EUR to RM5.034/EUR. It shows that the Malaysia Ringgit is weak. This is because the
government has implemented the Goods and Service Tax (GST) in a country starting from 1 st
April 2015. This situation caused Malaysian households would have curbed their household
spending due to the increase in prices. When Malaysian household cut-off their spending the
growth domestic product will decrease.

Another factor that caused Malaysia currency depreciates is because of speculation about
1MDB. The Wall Street Journal reported on 3rd July that about US$700 million may have
moved through government agencies and companies linked to debt-ridden 1Malaysia
Development Bhd before (somehow) ending up in an account bearing the name of Malaysia
Former Prime Minister Najib Razak. This speculation caused the foreign investor have a bad
perception toward Malaysia’s government. In fact, foreign funds (think big mutual funds and
investment funds) are already pulling out of Malaysian, dumping about US$3 billion of the
nation’s shares this year.

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3.0 LONG TERM FORECAST

i. Inflation, consumer price (annual%)

Inflation, consumer prices (annual %)

4
3.5
3
2.5 Inflation, consumer
prices (annual %)
2
1.5
1
0.5
0
2015 2016 2017 2018

Inflation is a quantitative measure of the rate at which the average price level of a basket
selected goods and services in an economy increases over a period time. It is the constant rise in
the general level of prices where a unit of currency buys less than it did in prior periods. Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s
currency. According to the diagram above 2015, the inflation rates in Malaysia are under control
compared to the previous year which it maintains between 2.1% to 2.2%. For the first eleven
months the inflation rate is averaged between 2%. Starting from 2016 to 2017 inflation and
consumer price increase drastically from 2.08% to 3.8%. Next year the inflation and consumer
prices decrease from 3.80% to 3.18%. Based on the newspaper Star Online on Friday, 22 March
2019 says that “inflation falls in February 2019”

According to Bank Negara Malaysia, the Malaysian inflation rate are expected to
moderate at 2018. They said, the inflation outlook is subject to two key risks. Externally, BNM
said stronger-than-anticipated increase in global oil prices could lead to headline inflation
averaging higher. Global oil price movements remain uncertain, subject to geopolitical risks and
developments in the US shale oil industry, BNM said.

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ii. Unemployment rate (%)

Unemployment rate (%)

3.5
3.4
3.3 Unemployment rate
(%)
3.2
3.1
3
2.9
2015 2016 2017 2018

The unemployment rate is defined as the percentage of unemployed workers in the total
labor force. Workers are considered unemployed if they currently do not work, despite the fact
that they are able and willing to do so. The diagram above shows that unemployment rate
Malaysia’s unemployment rate to average higher at 3.1% for 2015 from the 2.9% last year. In
2016 the unemployment rate stable at 3.44% compare to previous year but remained the highest
since November 2013. However, in 2017 the unemployment decrease by 0.02% from a year ago
is 3.42%. Malaysia’s unemployment rate was steady at 3.3%in 2018.

Malaysia’s unemployment is relatively low and stable at around three percent which
means the population is experiencing close to full employment. The country reached its lowest
level of unemployment in 2014, with a rate of 2.85 percent. Malaysia’s vibrant economy is
considered one of the strongest in South East Asia. Together with years of political stability, it
has been supporting such a low unemployment rate and good growth rates each year.

However, despite these positive statistics, news reports state that the number of job seekers
and those unemployed 3% are generally young people, both graduates and non-graduates, who
have had trouble entering the job market. Because of this, the Malaysian government is
encouraging companies to open up employment opportunities specifically to young adults. The
favorable economic climate should help. Yet, there have also been some complaints about
underemployment and gender discrimination within the country.

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iii. Population growth

Population growth (annual %)

1.65
1.6
1.55
1.5 Population growth (annual
%)
1.45
1.4
1.35
1.3
1.25
2015 2016 2017 2018

Malaysia is a federal state that has a monarchy system of governance. It is comprised of

13 large states and 3 different federal territories. Its area is about 330,803 square kilometers. The
Malaysian land is divided into two parts, namely Malaysian Borneo and Peninsular Malaysia,
between which the South China Sea flows. The population of Malaysia is estimated in 2019 to be
around 32.45 million, which ranks 45th in the world. Malaysia borders Brunei, Thailand, and
Indonesia. Its sea borders Singapore, Vietnam and the Philippines. Kuala Lumpur is the capital
of Malaysia. The current population of Malaysia is 32.45 million, a significant increase from
2013's estimate of 29,791,949. In 2014, the number of births taking place in Malaysia was
511,865 while deaths were recorded at 145,648.

The Malaysian population is growing at a rate of 1.94% per annum as of 2016. Malay
fertility rates are 40% higher than Malaysian Indians and 56% higher than Malaysian Chinese.
Population projections in 2017 show that the Malays and Bumiputeras comprised a total of
68.8% of the total population, Chinese 23.2% and Indians 7.0%. The Chinese population has
shrunk proportionally from 1957, when it was about 40% of Malaya, although in absolute
numbers they have increased around threefold by 2017 in Malaysia (2.4 million in 1957 to 6.6
million in 2017, the latter figure includes East Malaysia) but have been dwarfed by the fivefold
increase of Malays (from around 3.1 million in 1957 to 15.5 million in 2017)

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iv. Import of good and service

Import of good and service (% of GDP)

65

64

63
Import of good and service
(% of GDP)
62

61

60

59
2015 2016 2017 2018

The graph above shows the percentage of import of good and services in Malaysia from
2015 to 2018. The percentage of import of good and services in Malaysia start to decrease from
63% to 61% within a year which is 2015. At the end of 2015 the volume of import starts to
increase back from 61% to 64.4% within a year.

According to Department of Statistics Malaysia, total trade in February 2015 was valued
at RM101.8 billion. This amount actually dropped RM 5.6 billion which is -5.2% from a year
ago. It is also posted a decrease of13.9% or RM16.4 billion from previous month.

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v. Export of good and service

Export of good and service (% of GDP)

72

71

70
Export of good and service
69 (% of GDP)
68

67

66

65
2015 2016 2017 2018

The graph above shows the percentage of growth domestic product based on export. We
can see that the export of Malaysian goods and services start to decline from January to
December 2015. The percentage of growth domestic product was at 70.6% at January 2015 and
decreasing to 67.8% at December 2015.

According to Department of Statistics Malaysia, the export value declining RM5.7 billion
from RM58.9 billion based on y-o-y basis. This situation mainly contributed by commodities
such as petroleum, palm oil, liquid natural gas, crude petroleum, natural rubber, electrical and
electronic product and timber.

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4.0 RELATIONSHIP BETWEEN SHORT TERM & LONG TERM

It is expected by rising the export value will cause appreciation of Malaysia ringgit. Thus,
it is hypothesized that the relationship between export and foreign exchange rate positive it is
because the value is higher; the home currency will have appreciated more. It might due to when
export is larger than import, demand for local currency will be higher, and thus value of currency
will be appreciated, vice versa

If inflation is relatively lower than competitors, then the countries goods will become
more attractive and demand will rise. Thus, it shows the relationship between inflation and
foreign exchange rate is positive. Lower inflation tends to increase the value of the currency in
the long term. To reduce inflation, the government can pursue tighter fiscal and monetary policy
and also supply-side policies.

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5.0 RECOMMENDATION

In order to strength Malaysia ringgit, government should increase the productivity in the
long term. High productivity can increase level of income in Malaysia and product and service
become more competitive internationally. This can be done by encouraging more high
technology production and increase quality of human capital.

Next, we would like to recommend to the government to increase the interest rate. Higher
interest rates would attract some ‘hot money flows’. Hot money flows occur when banks and
financial institutions move money to other countries to take advantage of a better rate of return
on saving. Given interest rates are close to zero in the Malaysia, higher interest rates in
developing countries give a significant incentive to move money and savings there. However, as
a drawback, higher interest rates may reduce the rate of economic growth. In many
circumstances, e.g. in recession, higher interest rates would not be suitable due to side effect on
economic growth. Though if the economy was booming, higher interest rates would cause an
appreciation and moderate the rate of economic growth.

Last but not least, the government also can lower the inflation rate. If inflation is
relatively lower than competitors, then the countries goods will become more attractive and
demand will rise. Lower inflation tends to increase the value of the currency in the long term. To
reduce inflation, the government / Central bank can pursue tighter fiscal and monetary policy and
also supply-side policies.

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