Foreign exchange exposure and impact of policy switch – the case of Malaysian listed firms

Abstract

This article undertakes an in-depth study of the foreign exchange exposure of Malaysian listed firms. We examine several issues related to firm-specific and overall exposure, including an evaluation of the efficacy of adopting a hard-peg on such exposure. Our sample consists of 158 listed firms and spans the 16 year period, 1990–2005. A multivariate model using four bilateral exchange rates is used to determine firm level exposure while panel data analysis using a random-effects Generalized Least Squares (GLS) model is used to determine system-wide or aggregate sample exposure. We find a total 71% of our sample firms to have significant exchange rate exposure, a rate substantially higher than that reported for most countries, especially developed ones. The US$ is by far the single most important source of exposure with 63% of sample firms exposed to it. The sign of the beta coefficient for three of the four currencies are negative, implying that our sample firms are largely net importers in these currencies. We find exposure to be time variant and dependent on the sector within which a firm operates. Interestingly, the panel data analysis which measures aggregate exposure, shows the US$ to be a significant source of exposure even with the adoption of the hard peg. The change in policy regime to a fixed peg following the crisis appears to have had no impact at either firm-level exposure or overall system-wide exposure.

Keywords:

• firm-specific
• exchange rate
• exposure
• policy
• switch

JEL Classification::

• E42
• F31
• F39

Acknowledgements

The authors gratefully acknowledge MOSTI and The Research Centre, IIUM for the financial support.

Notes

¹ Computed as [(Exports + Imports)/GDP], for 2007, the FTR was 200.2% GDP.

² On 1 September 1998 Malaysia announced the imposition of a 1 year moratorium on capital outflows (excluding current account outflows) and the peg of the MYR to the US$ at 3.80 MYR per US$.

³ In evaluating exposure over time, they have subdivided their sample period into three equal sub-periods of three (3) years each. Such subdivision, however, does not match the events/episodes that had an impact on exchange rates, especially in the case of Malaysia.

⁴ Their data includes the Malaysian Stock Index. Their period of study is 1980–1998.

⁵ They show that more than 70% of their sample firms have exposure to the US$.

⁶ The Ringgit was pegged to the US$ from 1 September 1998 to 21 July 2005, a period of about 7 years.

⁷ (83/156 for crisis period) and (96/156) for peg period).