From year 2015, Malaysia’s economy has a decline.

As there are some factors that

directly or indirectly and internally or externally influenced the economy. Such as the weak
demand for exports, the 1MDB scandal, China’s economic slowdown, US interest rate hike
and so on. All of these factors are the source of the depreciation of ringgit as well as
economic slowdown. However, since there are some policies adopted by the Malaysian
government to overcome these issues, the overall economy has an increasing phenomenon.

Based on the data forecasted from the World’s Leading Economists (2017), shows
that the Malaysian economy growth (GDP) in 2015 had actually decreased 16.67% from 6%
in year 2014. Also, for both export and import had decreased USD 68 billion and from USD
443 billion in year 2014. All of this declining happened are based on the factors that I
mentioned above.

As Robert Hill (2015), an economist, said the Malaysian ringgit peaked at 4.46 MYR
per USD on 29 September 2015. Since late summer, the currency has been in a tailspin after a
number of internal and external factors conflated to shake investors’ confidence in Malaysian
assets, resulting the ringgit became one of the world’s worst-performing currencies.

There are many ways that the ringgit has been attacked. According to the analysts,
global crude oil prices have plummeted by over 50% since June 2014 because of oversupply
and weak demand. Weak demand of Malaysian exports, particularly oil products and natural
gas, which make up nearly a quarter of total exports, has persisted since oil prices collapsed
in year 2014. Palm oil prices were also on the decline. Malaysia is hit because oil-related
industries account for a third of its revenue and the country is also the world’s second-largest
palm oil producer. (Zara, 2015)

As a matter of fact, the China’s economic slowdown will indirectly affect ringgit. The
rationale for China’s currency devaluation is to boost exports by making them price-
competitive and thus stimulate growth. China has been trying to shift its export-driven growth
to consumer spending, but evidently, this has not been smooth sailing. Just two months prior
to China’s currency devaluation, its stock market plummeted 30% and it took government
intervention to halt the sell-off. (Saleem, 2015)

Well, China, as a top trading partner of Malaysia; Malaysia exports primarily

electronics followed by oil to China. Notable, Malaysia’s continuous decline in trade surplus
was reversed in June 2015 with an expansion of oil-gas exports to China. Given the lower oil
prices, this may be in China’s interest, but contraction in Chinese demand will lead to a
decline in Malaysia’s primary exports to China. Malaysia will not be able to ride on Chinese
demand as it has been doing for the past decade. (Saleem, 2015)

Also, political turmoil surrounding 1MDB (1 Malaysia Development Berhad), which

made the currency depreciated as well. The Wall Street Journal reported on 3 rd July that about
USD 700 million way have moved through government agencies and companies linked to
debt-ridden 1MDB before ending up in an account bearing the name of Malaysia Prime
Minister, Najib Razak. As the Malaysia PM grapples with allegations of financial
irregularities at a state investment company, confidence of the Malaysian currency will
definitely be influenced. In fact, foreign funds were already pulling out of Malaysian,
dumping about USD 3 billion of the nation’s share in 2015. (Yeo, 2015)

Not only have that, the US interest rate hike affects Malaysia Ringgit as well.
According to Cecilia Kok (2014), an author from the Star News, examined that for Asian
economies, such as Malaysia, is that hot money will flow out and move back to advanced
economies (developed countries). The consequences of this will be volatility in the financial
markets and depreciation of the currencies of Asian economies. Hot money means that the
capital flows moving to countries with higher interest rate or expected changes in exchanges
rate.

In 2015 December, the U.S. Federal Reserve (FED) raised its target federal funds rate
to a range of 0.25 percent to 0.5 percent, making its first rate increase since June 29, 2016.
The currency in Malaysia has already taken a beating over the past year, and the interest rate
increases in the U.S. are set to deal it another blow. According to Mitul Kotecha, head of
Asia foreign-exchange at Barclays, said that the ringgit is a little bit more vulnerable to Fed
hikes, tightening in dollar liquidity and capital outflows. As Malaysia is commodity exporter.
Higher U.S. interest rates are set to boost the U.S. dollar, which will weigh on the prices of
dollar-denominated commodities. Well, sharp drops in the prices of Malaysia’s commodity
exports, have helped to weaken its currency to levels last seen during the 1998 Asian
Financial Crises. The U.S. dollar has strengthened around 24 percent against Malaysia’s
ringgit. (Shaffer, 2015)

As a result, the fall of ringgit has brought some negative effects. According to
SpurPress (2015), the first negative effects which are the increasing of interest payment. It
means that the businesses that have loaned or have partnership with foreign parties will have
to pay a larger amount in interest, especially using the US dollars as the trading currency.
Second of all, the lower economic growth. With a slow-paced economy, consumers would be
spending less which means slower profit stream for business, this is a threat to their viability.
Well, the Wawasan 2020 may have to wait a few years longer. Actually, Malaysia economy
growth had a decline as I have mentioned above.

Lastly, the fall of stock market prices. The pieces of stocks traded in an economy are
expected to fall following depreciation in the domestic currency. The currency depreciation
would yield a lower value of dividend payments for local stockholders in that economy. Also,
the depreciation can signal low growth opportunities for traders who hold stocks in domestic
economy (SpurPress, 2015). In fact, based on Yahoo Finance shows that the FTSE Bursa
Malaysia KLCI (^KLSE) had a huge drop in the late summer of 2015.

Not only that, for these three sectors, which are household sector and firm sector,
have some negative impacts in depreciation of ringgit as well. For the household sector,
Malaysian households will suffer a loss of purchasing power as the foreign goods and
services become expensive. It will lead to their standard of living to be reduced compared to
residents in other countries. Also, the parents have to pay more money while children
studying abroad, especially in U.S. or Singapore. Besides, health care is likely to become
more expensive as medical goods are generally imported from overseas and the price is
measured in US dollar. (Lim et al., 2015)

Moreover, for the firm sector, the goods imported from foreign countries and
measured in foreign currencies but sold in the local market became less profitable. And,
companies selling to local consumers will be pressured as domestic consumption demand
cools when consumers become cautious. Also, for those companies who borrowed with
foreign parties will have to pay a larger amount since the interest rate hike and depreciation in
ringgit as I mentioned earlier. (Lim et al., 2015)

According to Chin (2016), an author from the Star News, showed that the Bank
Negara Malaysia (BNM) has unexpectedly reduced the Overnight Policy Rate (OPR) by 25
basis points to 3% on 13 July 2016. This move could see banks lowering their lending rates
and making it cheaper for eligible consumers and companies to take loans. Correspondingly,
the saving rates could also go down. It indicates that the companies will have more funds to
boost the economy, and the consumers will have more money to spend, as well as to invest.
Also, it gave the stock market a boost, as the FBM KLCI closed up 6.42 points to 1,660.39
after the announcement was made at 3 pm.
 Also, after the announcement, the ringgit has shown improvement against numerous
major currencies in the world, such as US Dollar, Singapore Dollar and British Pounds. It is
because a lot of foreign came in to position for a future OPR cut, and this helped Ringgit
strengthen again. The reduction of the OPR, however, was not beneficial to financial
institutions as it adds more pressure to the banks. But the cut seems to be more manageable
for certain banks such as Maybank, Ambank, and Affin Bank as their fixed rate cover almost
30% of their loan portfolios. (Mangalesri, 2016)

After 7 times of meetings, the Monetary Policy Committee (MPC) of BNM still
decided to maintain the OPR at 3 percent on 7 September 2017. The Malaysian economy
recorded a higher growth in the second quarter of 2017, driven by firmer domestic activity
and exports. Looking ahead, growth prospects will be sustained by the more positive global
growth outlook and stronger spillovers from the external sector to the domestic economy.
Domestic demand will remand the key driver of growth, supported by improving incomes
and overall labour market conditions, new and ongoing infrastructure projects and sustained
capital investment by firms in the manufacturing and services sectors. Overall, growth in
2017 will be stronger than earlier expected. (Bank Negara Malaysia, 2017)

Not only that, the domestic financial markets have been resilient. The ringgit has
strengthened to better reflect the economic fundamentals. Banking system liquidity remains
sufficient with financial institutions continuing to operate with strong capital and liquidity
buffers. The growth of financing to the private sector has been sustained and is supportive of
economic activity. (Bank Negara Malaysia, 2017)