Impact of the COVID 19 on international trade of Malaysia
COVID 19 pandemic has impacted the all the aspects of the economy of Malaysia including international trade. In this article, we will discuss about the Impact of the COVID 19 on international trade of Malaysia.
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Impact on exchange rate (Ringgit Vs. US dollar)
Exchange rate means expressing one currency’s value in another currency (Definition of ‘Exchange Rate, 2019). Here we can identify two types of currencies. They are domestic currency and foreign currency. Domestic currency means the currency which is transacted within a particular country and foreign currency means the currency which is transacted within another country. In this case, we consider Malaysian Ringgit as the domestic currency which is transacted within Malaysia and US dollar as the foreign currency which is transacted within USA.
There are two major types of exchange rates. They are, fixed exchange rate and floating exchange rate. Fixed exchange rate is decided by central bank of a country while floating exchange rate is decided by market demand and supply mechanisms. In this study, I will discuss that how COVID 19 pandemic impacted on the floating exchange rate of Malaysia.
According to the evidences, exchange rate of Malaysia (MYR/ USD = value of the Malaysian Ringgit in US Dollars) has been decreased as a result of the COVID 19 pandemic as presented in the following graph.
Before the COVID 19 pandemic affected to Malaysia at the 1st of January 2020, One Malaysian Ringgit was valued 0.244 USD. But after the effect of COVID 19 pandemic, at the 25th of March 2020, One Malaysian Ringgit was valued 0.226 USD. This was the worst effect of the Malaysian Ringgit by the COVID 19 pandemic which showed highly depreciated the value of Malaysian Ringgit for past two years. Malaysia has performed Asia’s worst performance of exchange rates by decreasing Malaysian Ringgit from one percent compared to the USD in May, 2020. (The Straits Times, 2021).
Also, still bad effect of the COVID 19 has not recovered. At the 30st of September 2021, One Malaysian Ringgit was 0.239 USD. We could not reach to the exchange rate that was prevailed before COVID 19 pandemic.
Impact on the trade and the balance of payments
Balance of Payments (BOP) shows all the transactions are made by a particular country with rest of the world for the particular period. BOP of Malaysia has decreased as a result of the COVID 19 pandemic.
BOP comprises with three major accounts. They are current account (This includes the balance of trade), capital account and financial account. Let’s consider about the impact of the crisis on these three accounts of Malaysia.
Current account
Current account keeps records on the goods and services inflow and outflow of a country. It includes the balance of trade (that record the value of net exports) also. As a result of the COVID 19 pandemic, in the year 2020, balance of trade and current account balance are very badly decreased.
But after the second quarter of 2020, current account of Malaysia is significantly recovered. Trade performance of Malaysia has increased from 48.7 % when compared to May of 2020. (Malaysia External Trade Development Corporation, 2021).
Capital account
Capital account represents the net value of the international capital transfers. In other words, it shows net value of inflow and outflow of investments and loans. When we consider about the capital account of the Malaysia, it shows higher negative values as a result of the COVID 19 pandemic.
Financial account
Financial account presents the inflow and outflow of the foreign reserves and private investment in real state, stocks, business, bonds and so on. According to the annual report of the central bank of Malaysia (Bank Negara Malaysia) as an impact of the COVID 19 pandemic, in the year 2020, financial account has recorded net outflow value of Ringgit 79.1 billion (BNM Annual Report, 2021).
Impact on domestic consumers
Domestic consumers in other words house holders spend their money to buy goods and services that they need. This is called domestic consumption, private consumption or household expenditure.
GDP of a country comprises with four major components. They are household consumption, investment, government expenditure and net exports. Household consumption can be considered as a major component of the GDP of majority of countries. When we consider about Malaysia, private consumption accounts for the about 50 percent of the GDP as presented in the following graph.
As a result of the COVID 19 pandemic, total domestic consumption of the Malaysia has decreased. According to the Bank Negara Malaysia, because of many people lost their employment opportunities and sometimes people lost their jobs permanently, private consumption has decreased. Also, movement restrictions have reduced the significant amount of physical selling expenditure. (Ikram, 2021).
Following graph will present how private consumption has decreased as a result of COVID 19 pandemic in Malaysia.
According to the above graph, private consumption of the Malaysia has decreased from 22.9 percent in the second quarter of 2020. This was the largest impact on private consumption in Malaysia by the COVID 19 pandemic.
Although the real value of the private consumption has reduced by COVID 19 pandemic, it has increased the percentage of private consumption within the GDP. In the year 2020, private consumption has represented 75.2 percent from the GDP. Because, in the year 2020, there was a low level of investment expenditure. So, private consumption has represented a higher percentage of GDP.
But in the year 2021, especially in the second quarter, investment of the Malaysia has boosted. So contribution of the private consumption for the GDP has decreased to 54.8 percent. (CEIC DATA, 2021).
Impact on domestic producers
Malaysia has a really good business environment to operate a business. There are large number of domestic producers in the Malaysia that operate in different areas such as rubber and palm oil processing, fashion manufacturing, grocery and so on. But COVID 19 pandemic has seriously influenced the domestic producers in Malaysia as follows (United Nations, 2021).
- Many firms have to face the problem of decreasing demand for their products. So, they have lost considerable income and this has created a shortage in the cash flow. So, many firms has to cut their operational expenses to minimize the cash flow shortage.
- Firms have to face with input shortage. Because global supply chain has been disrupted as a result of the COVID 19 pandemic. So, firms have to postpone the operations since they do not have inputs.
- Especially Small and Medium Sized Enterprises are highly affected by COVID 19 pandemic. They took 4-6 months to recover the business operations. But, some of the SMEs never started their operations after the COVID 19 pandemic.
As the results of the above situations, percentage of investment expenditure from the Nominal GDP of Malaysia has decreased as follows.
But investment percentage in Nominal GDP has considerably increased in the second quarter of year 2020 and 2021. That is really helpful for the recovery process of the Economy.
References
BNM Annual Report. (2021, March 31). BNM: Malaysia’s 2020 financial account recorded higher net outflow at RM79.1b as FDI inflow moderated. The Edge Markets. https://www.theedgemarkets.com/article/bnm-malaysias-2020-financial-account-records-higher-net-outflow-rm791b-fdi-inflow-moderates
CEIC DATA. (2021a). Malaysia Current Account Balance, 1999 – 2021 | CEIC Data. Www.ceicdata.com. https://www.ceicdata.com/en/indicator/malaysia/current-account-balance
CEIC DATA. (2021b). Malaysia Investment: % of GDP [1991 – 2020] [Data & Charts]. Www.ceicdata.com. https://www.ceicdata.com/en/indicator/malaysia/investment–nominal-gdp
CEIC DATA. (2021c). Malaysia Private Consumption: % of GDP, 1991 – 2021 | CEIC Data. Www.ceicdata.com. https://www.ceicdata.com/en/indicator/malaysia/private-consumption–of-nominal-gdp
DEPARTMENT OF STATISTICS. (2021). Malaysia BoP: Capital Account | Economic Indicators | CEIC. Www.ceicdata.com. https://www.ceicdata.com/en/malaysia/balance-of-payments-bpm6/bop-capital-account
Department of Statistics Malaysia. (2021, September 30). Quarterly Balance of Payments, Second Quarter 2020. Www.dosm.gov.my. https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=86&bul_id=dTVQZTVaaE1obUMwY3NTdzRXZzZTQT09&menu_id=azJjRWpYL0VBYU90TVhpclByWjdMQT09
Ikram, I. (2021, March 31). Private consumption dropped by 4.3% in 2020 but expected to rebound 8% in 2021. The Edge Markets. https://www.theedgemarkets.com/article/private-consumption-dropped-43-2020-expected-rebound-8-2021
Malaysian Ringgit to US Dollar Exchange Rate Chart | Xe. (2021, September 30). Www.xe.com. https://www.xe.com/currencycharts/?from=MYR&to=USD&view=2Y
MOODY’S ANALYTICS. (2021). Malaysia Private Consumption | Moody’s Analytics. Www.economy.com. https://www.economy.com/malaysia/private-consumption
The Straits Times. (2021, June 7). Ringgit shrugs off Malaysia’s Covid-19 lockdown in sign worst of losses may be over. The Straits Times. https://www.straitstimes.com/business/economy/ringgit-shrugs-off-malaysias-covid-19-lockdown-in-sign-worst-of-losses-may-be-over
