Forex in Malaysia and how it works

Adoption of liberalization economic policies, can hinge on the mobilization of the pivotal groups that are characterized by the dispersed rather than the concentrated interest groups align in coalitions and mobilize for or against certain policy stances. It is much harder to see the effects that more dispersed groups have on policy outcomes. There are instances, though, when they become critical players in tilting the balance toward or away from policy reforms .We look at the case of Malaysia, a country, a country that had been making steady progress toward liberalizing its financial system. But when struck by crisis, it restored to a surprise strategy of closing its capital accounts.
Malaysia’s response to the crisis stands out. Most countries hit by the crisis tool the IMF’s advice and the IMF’s money. Interest rates were raised and fiscal spending was cut to stem capital flight and control and extent of devaluation.Structural reforms were also part of the usual effort to restore investor confidence. Heavily indebted banks and firms were forced to restructure, restore competitiveness and reassure investors that similar sources of competitive weakness would not develop in the future. But this is not what happened in Malaysia. Most noticeably, contrary to what had become “conventional” wisdom in the international financial circles, Malaysia closed its capital accounts. Malaysia lowered rather than increased interest rates, using exchange controls to fend off attacks on its currency. Lower interest rates and in some cases bank bailouts and fiscal or quasi-fiscal subsidies were used to shore up debt-ridden corporations .Malaysia’s currency, the Ringgit, is currently pegged to the dollar. Some officials feel it may be undervalued by as much as 12%; accordingly, it may soon allow the currency to float. Economists are forecasting the dollar could decline an additional 30% in the short-term,This would actually leave the Ringgit overvalued, relative to the rest of the world’s Currencies.

To make matters worse, it looks like the global economy will recede in 2008,
which gives Malaysia only a few years to un-peg the Ringgit. Failure to do so could exacerbate the effects of such a global recession on the Malaysian economy. At this point, Malaysia has two options. It could either un-peg the currency and allows to float completely, or instead gradually  adjust the peg until the Ringgit stabilizes at its fair value. The fractal scaling behaviors of foreign currency exchange rates with respect to Malaysian currency, Ringgit Malaysia. These time series are examined piecewise before and after the currency control imposed in 1st September 1998 using the mono fractal model based on fractional Brownian motion.

The global Hurst exponents are determined using the R/S analysis, the  detrended fluctuation analysis and the method of second moment using the correlation coefficient .The usual multifractal analysis reveals that there exists a wide range of Hurst exponents in each of the time series..Over the past two decades, there has been a decisive shift in trade and industry policy in developing countries (DCs) away from import substitution and towards export-orientation. As part of this policy shift, an increasing number of DCs have become more receptive to foreign direct investment (FDI). Despite its policy relevance, the literature on the role of FDI in export expansion, employment generation and spillovers in DCs is sparse. This paper attempts to fill this gap through a case study of the role of export-oriented FDI in Malaysia’s rapid industrialization.

The overall conclusion of the paper is that export-oriented FDI has brought significant returns to Malaysia principally because the general economic climate has been favourable for the internationalization of production for a considerable period of time.