BEO2003: International Economics and Finance: Exchange Rate Analysis

This report presents an analysis of the exchange rate between the Australian dollar (AUD) and the Malaysian ringgit (MYR), examining its impact on businesses operating between the two countries. The report focuses on a case study of Perodua, a Malaysian car manufacturer, and its operations in Australia, analyzing how exchange rate fluctuations and inflation rates affect its financial performance. The report also explores the Malaysia-Australia Free Trade Agreement (MAFTA), assessing its effects on Australian companies, particularly Hella Australia. The analysis covers the operational changes before and after MAFTA, considering factors such as import tariffs, access to resources, competition, and technological advancements, concluding with an overview of the benefits and challenges associated with the trade agreement and exchange rate dynamics for both countries.

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BEO2003 INTERNATIONAL ECONOMICS & FINANCE
SEMESTER 2 2019

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Contents
Introduction................................................................................................................................3
Part 1: Exchange rate, Australian dollar versus Malaysian Ringgit...........................................3
Part 2: Malaysia Australia Free Trade Agreement.....................................................................6
Conclusion..................................................................................................................................9
Reference..................................................................................................................................10

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Introduction
Australia and Malaysia are successful trade partners to each other since 2013. The
strengthened economies of these two countries have resulted in a mutual expansion of the
GDP of both countries. This paper aims to study the trade agreement between the two
countries taking different macroeconomic indicators for the comparison. The paper also uses
the case studies of two different firms in order to understand the impacts of the free trade
agreement between the countries.
Part 1: Exchange rate, Australian dollar versus Malaysian Ringgit
The Malaysian company chosen for the study is Perusahaan Otomobil Kedua Sendirian
Berhad or Peorodua which is the largest car manufacturer of Malaysia. The company was
established in the year 1992 and released its first car in 1994 (Bicen and Johnson, 2016). The
car manufactured by Perodua has a market share of 35% which is the largest compared to the
other companies in the market. The company also operates in Australia and high demand for
a car of this company has made its penetration successful. The company makes a lot of
payments to the Australian economy using US dollars and hence the exchange rate of
Malaysia and Australia is important for the operation of the company.
Malaysian exchange rate analysis
The value of the Malaysian ringgit is measured using the value of a dollar in terms of ringgit.
Therefore, an upward sloping curve for the value of ringgit means the currency is
devaluating. The figure below shows the value of the ringgit over the years.
Figure 1: The value of the Malaysian currency over the years
(Source: Tradingeconomics.com, 2019)

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The figure above shows that Malaysian ringgit has devaluated over the years. In the year
2013, 1 USD was equivalent to 3.21 dollar which has increased to 4.13 dollar in the year
2019. That means the value of the currency is falling over the years (Wilson, 2016). One of
the biggest reasons for the increase in the exchange rate of the currency of Malaysia is the
interest rates. Legrenzi (2016) noted that the increase in interest rate increases the foreign
investment into the country and hence the demand for the currency increases leading to a
higher value of the currency. On the other hand, when the interest rates are low, the
investment inflow into the country reduces thereby reducing the demand for the Malaysian
currency leading to a depreciation of the value of that currency.
Figure 2: The inflation rate of Malaysia over the years
(Source: Tradingeconomics.com, 2019)
The above figure shows that the inflation rate is another factor that influences the exchange
rate of the Malaysian currency. Jerrard et al. (2019) stated that inflation rates devaluate the
currency more as the price in the domestic market increases. In this case, the fluctuations in
the inflation rate have devaluated the value of the Malaysian ringgit.
Australian exchange rate analysis
In this case, the exchange rate of Australia has been measured in terms of the value of one
dollar. Therefore the downward slope of the curve shows that the Australian currency has
been appreciated.

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Figure 3: The value of Australian currency over the years
(source: Tradingeconomics.com, 2019)
The figure above shows that, over the years the currency of Australia has become stronger
compared to other developed nations of the world. The reason for the appreciation in the
value of the currency is the higher interest rates of the economy which has in the recent times
increased the investment inflow into the system of Australia (Yean, 2017). That, in turn, has
increased the demand for Australian currency leading to an increase in the value of Australian
dollars.
Figure 4: The inflation rate of the Australian economy

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(Source: Tradingeconomics.com, 2019)
Inflation in the economy of Australia has reduced compared to the previous years on an
average. This has increased the value of the Australian currency over the years. The inflation
rate in the economy of Australia has followed the business cycle and hence, therefore,
oscillates around a certain point.
Impact of the exchange rate on the company
Perodua has its operation in Australia as well and hence it requires them to pay foreign
stakeholders in USD. Therefore the exchange rate of the Malaysian ringgit and Australian
dollar are crucial for the operation of the company. As the figure above shows that Malaysian
ringgit has depreciated over the years that mean the revenue of the company in terms of
domestic payment becomes a burden. In this case, the company has to pay more in terms of
the Malaysian ringgit to clear the due amounts of the company (Syarip, 2019). Apart from
that, the company also bought some of the raw materials from foreign countries. In that case,
as well, the company has to pay using dollars and hence due to the devaluation of the
currency, it will have to pay more for the raw material.
On the other hand, as the company operates in Australia, its exchange value also influences
the operation of the company. When the company operates in Australia it earns in the
Australian dollar which is appreciating at the moment. Therefore the real revenue of the
company in the Australian market is more than the real revenue in the Malaysian market. In
addition to that, the net debt payment of the company operating in Australia is less due to the
higher value of the Australian dollar compared to the USD (Voon, 2017). However, one of
the disadvantages of appreciation of the Australian dollars compared to the US dollars is the
fact that company has to pay proportionately more to the workers of the company that can
also increase the cost of operation. The company can be in danger in the wake of rising
operational cost if the exchange rate of the Australian dollar reduces in the coming years.
Part 2: Malaysia Australia Free Trade Agreement
MAFTA is a trade association between Australia and Malaysia for access to each other’s
economy. The trade association commenced in the year 2013 and has been in the place since
then. The impacts of the MAFTA on Australian companies will be examined using the
company of Hella Australia. Hella Australia is a company that designs and manufactures
automotive lighting equipment for other businesses in the market. Hella Australia is large in

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terms of the market share it has which is 29% in Australia (Mitchell et al. 2017). The impacts
of the MAFTA will be analysed comparing the operation of Hella Australia before and after
the MAFTA.
Operation of Hella Australia before MAFTA
Before MAFTA Hella Australia had the access to only the Australian market and it used
inputs bought from the Australian market only. The reason behind this is the fact that there
were a huge tariff and quota for import from other countries. In addition to that, before
MAFTA Hella Australia had a higher cost of operation production as it had to acquire raw
materials from sources which had a higher cost. In addition to that, before MAFTA the
company had no access to updated information regarding the production of cars (Tan et al.
2017). The knowledge transfers were restricted due to the presence of tariff and quota related
to the higher average cost of operation of the company.
Furthermore, the company could not access the markets of Asian countries such as that of
Malaysia due to the presence of tariff in the domestic economy of Malaysia. The exportation
of cars to the Malaysian market was expansible which was not economically feasible for the
company. The company also had operated with obsolete production technology due to the
lack of technological innovations before MAFTA (Brown, 2017). The competition with the
rivals of the market was not much high not creating much pressure on the company to
innovate in the technological field of production. The company also failed to meet its goals
and aims to make the car affordable to the customers belonging to the lower segment of
income.
Additionally, before the trade agreement with Australia, the productivity of labours was less
as well. The investors of the market were not likely to invest in a company that had no scope
for expansion in the Australian market. Legrenzi and Harders (2016) stated that the absence
of the trade association reduced the potential of the company in the last few years.
Consequently, the company also did not have many contributions to the national GDP of
Australia. The main reason for the inability of the country to contribute to the national GDP
was the low production level of the country before the MAFTA trade association. The
company also did not face diversified customers of the market due to geographical limitations
and hence products variety deteriorated over the years. Therefore, to sum up, the absence of
the trade association between Malaysia and Australia reduced the potential of the company

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and the GDP of Australia as a whole. The customers of the markets were deprived of
different choices and hence the social utility was low.
Operation of Hella Australia after MAFTA
Since the association of the countries in 2013, the company has been exporting cars to the
market of Malaysia. The company has experienced an increase in demand due to the
reduction in the cost of operation and hence the prices of the cars. This has been possible due
to the association of the countries in terms of trade (Mitchell et al. 2017). The import tariffs
and quotas have been eliminated as per the negotiation in both the countries that helps in the
free flow of knowledge between the sellers of Australia and Malaysia. The MAFTA has also
allowed Hella Australia to tap that resource from the combined market of Malaysia and
Australia which provides services in lowest cost.
In addition to that Hella Australia has been able to compete with other sellers of the markets
based in Malaysia. The competition has not only allowed the management to reduce the price
per car but also allowed to acquire information relating to the technology of production that
has significantly reduced the average cost of production of Hella Australia. The production of
the company has increased after MAFTA as the company has a larger customer base to serve.
Therefore the company can use the economies of scale to further reduce the average cost of
production. The increase in demand and revenue due to the increase in the customers of the
market has increased the output level of the company. Harders (2016) noted that the output of
the company has increased by 41% since 2013 when there was no association between the
two countries.
Consequently, the company has been able to contribute significantly to the national GDP of
Australia after the implementation of MAFTA. The trade association has provided the
incentive to the company to innovate the different process of production so that it can
produce a competitive edge to the company. According to Granados et al. (2018), the lower
operational cost has played a pivotal role to incentivise the company in engaging innovation
and research. The MAFTA is thus beneficial for the customers of the market as well, as they
can now have a different number of products to choose from. The foreign investors have
become likely to invest in the operation of Hella Australia now as they have huge scope to
grow in the coming years. Another reason for the attractiveness to invest in Hella Australia is
the increase in the productivity of labours of the company. Legrenzi (2016) stated that the
productivity of the labours can be increased thereby investing in the capital of production.

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This allows each of the labours to produce more output at given effort leading to an increase
in productivity and output. Therefore, after MAFTA the company has been able to operate at
its potential thereby benefitting the customers of the market as well.
Conclusion
Therefore, the Malaysian exchange rate is not performing as good as the Australian exchange
rate and hence it is a burden for the companies operating in Malaysia. In addition to that, the
trade association between the two countries, MAFTA has not only helped the companies, but
it also has amplified the GDP growth rate of Australia. MAFTA allowed the chosen company
to source resources from the cheapest available options which in turn has led the company to
reduce the price of the cars. The implementation and adherence to MAFTA also increased the
productivity of all the inputs to the production system as well.

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Reference
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