1 EXCHANGE RATE VOLATILITY EFFECT ON MACROECONOMIC FUNDAMENTALS IN THE GULF COOPERATION COUNCIL COUNTRIES 1 1 Very preliminary research, not to be quoted Mohammad Ahlis Djirimu Faculty of Economics Tadulako University, Central Sulawesi, Indonesia Andi Darmawati Tombolotutu Palu Muhammadiyah University, Central Sulawesi, Indonesia Farida Milias Tuty Faculty of Economics Tadulako University, Central Sulawesi, Indonesia Abstract At the time, based on the experience of the Southeast Asian and Latino American Countries, rates of investment and capital inflows have been high after the period of low rates of return of capital. However, moral hazard, because of excessive external debt, and the currency and maturity mismatch, remained the main problem in these countries. Regarding the financial dimensions, before the crisis 1994 and 1997, several key issues such as lack of control by the central banks, weak banking regulations, lack of insurance on saving of customers, the collusion between banks and private enterprises, corruption, low capital adequacy ratio, the failure in the institutions of regulatory experts, neglect and application of non-rational criteria in the allocation of the credits handicapping the state. The consequence of the rapid liberalization of current account and the deregulation of financial markets has resulted in increased capital inflows. This extension of the liberalization of capital markets was to support the provision of national institutions and private sector funds at low cost. Similarly, exchange rate policy applied by South-East Asia and Latino American was to reduce the volatility of domestic currency against the dollar, especially the risks of the debt in dollars. Internationally, the moral hazard has led international banks to lend to domestic banking sectors in South-East Asia and Latino American by neglecting the criteria of prudence. However, there was an asymmetry of regional exchange rates. The Gulf Cooperation Council (GCC) was founded in 1980 by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). Since its inception, the GCC main objective of the GCC is to achieve economic integration between the forsaid countries, many steps have been taken out of these are the unified tariffs and a plan to achieve a monetary union by 2010. A successful monetary union requires adopting an effective single monetary policy, financial market integration, and reasonable economic convergence. One of the problem would be faced by the countries toward the economic integration is exchange rates volatility. Based on this reason, we would like to investigate the exchange rates volatility effect on macroeconomic fundamental in GCC countries. The countries under study are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The GCC data cover 40 observations from the 1970 to the 2011. In this study, the exchange rates volatility, reserves minus gold, export, investment, inflation level, crude petroleum production, gross domestic product refers to the CD-ROM International Financial Statistics International Monetary Fund (IFS- IMF) and website of each Central Bank country data and reports of the Central Bank concerned. The approach used in estimating the exchange rates volatility effect on macroeconomic fundamentals in six GCC countries is based on Augmented Dickey-Fuller test (ADF), Granger’s causality test, Johansen’s co-integration test, vector autoregressive (VAR) or vector error correction models (VECM). According to our hypothesis, in the case of GCC’s macroeconomic vulnerability, this empirical research finds out that in the GCC countries, macroeconomic vulnerability is on track of the relation between exchange rate volatility and reserves minus gold, export, the inflation level by which inflation pass-through plays an important role, investment, the crude petroleum production, GDP. In partially, macroeconomic vulnerability can be proved by linkage between exchange rate volatility and reserves minus gold, by linkage exchange rates volatility and export, between exchange rate volatility and investment, by correlation between exchange rate volatility and inflation level, between exchange volatility and crude petroleum production, and by linkage between exchange volatility and GDP. In general, in the Gulf Coperation Council Countries (GCC), exchange rate volatility only affect significant positively on crude petroleum and investment especially in Bahrain, Kuwait, Saudi Arabia. While in Oman, Qatar and the United Arab Emirates, exchange rate volatility does not affect the macroeconomic fundamentals. (JEL: E00, F30, O53) Keywords: exchange rates volatility, reserves minus gold, export, investment, inflation level, crude petroleum production, gross domestic product, GCC countries.
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EXCHANGE RATE VOLATILITY EFFECT ON MACROECONOMIC
FUNDAMENTALS IN THE GULF COOPERATION COUNCIL COUNTRIES1
1 Very preliminary research, not to be quoted
Mohammad Ahlis Djirimu Faculty of Economics Tadulako University, Central Sulawesi, Indonesia
Andi Darmawati Tombolotutu
Palu Muhammadiyah University, Central Sulawesi, Indonesia Farida Milias Tuty
Faculty of Economics Tadulako University, Central Sulawesi, Indonesia Abstract
At the time, based on the experience of the Southeast Asian and Latino American Countries, rates of investment and capital inflows have been high after the period of low rates of return of capital. However, moral hazard, because of excessive external debt, and the currency and maturity mismatch, remained the main problem in these countries. Regarding the financial dimensions, before the crisis 1994 and 1997, several key issues such as lack of control by the central banks, weak banking regulations, lack of insurance on saving of customers, the collusion between banks and private enterprises, corruption, low capital adequacy ratio, the failure in the institutions of regulatory experts, neglect and application of non-rational criteria in the allocation of the credits handicapping the state. The consequence of the rapid liberalization of current account and the deregulation of financial markets has resulted in increased capital inflows. This extension of the liberalization of capital markets was to support the provision of national institutions and private sector funds at low cost. Similarly, exchange rate policy applied by South-East Asia and Latino American was to reduce the volatility of domestic currency against the dollar, especially the risks of the debt in dollars. Internationally, the moral hazard has led international banks to lend to domestic banking sectors in South-East Asia and Latino American by neglecting the criteria of prudence. However, there was an asymmetry of regional exchange rates.
The Gulf Cooperation Council (GCC) was founded in 1980 by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). Since its inception, the GCC main objective of the GCC is to achieve economic integration between the forsaid countries, many steps have been taken out of these are the unified tariffs and a plan to achieve a monetary union by 2010. A successful monetary union requires adopting an effective single monetary policy, financial market integration, and reasonable economic convergence. One of the problem would be faced by the countries toward the economic integration is exchange rates volatility. Based on this reason, we would like to investigate the exchange rates volatility effect on macroeconomic fundamental in GCC countries.
The countries under study are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The GCC data cover 40 observations from the 1970 to the 2011. In this study, the exchange rates volatility, reserves minus gold, export, investment, inflation level, crude petroleum production, gross domestic product refers to the CD-ROM International Financial Statistics International Monetary Fund (IFS-IMF) and website of each Central Bank country data and reports of the Central Bank concerned. The approach used in estimating the exchange rates volatility effect on macroeconomic fundamentals in six GCC countries is based on Augmented Dickey-Fuller test (ADF), Granger’s causality test, Johansen’s co-integration test, vector autoregressive (VAR) or vector error correction models (VECM).
According to our hypothesis, in the case of GCC’s macroeconomic vulnerability, this empirical research finds out that in the GCC countries, macroeconomic vulnerability is on track of the relation between exchange rate volatility and reserves minus gold, export, the inflation level by which inflation pass-through plays an important role, investment, the crude petroleum production, GDP. In partially, macroeconomic vulnerability can be proved by linkage between exchange rate volatility and reserves minus gold, by linkage exchange rates volatility and export, between exchange rate volatility and investment, by correlation between exchange rate volatility and inflation level, between exchange volatility and crude petroleum production, and by linkage between exchange volatility and GDP.
In general, in the Gulf Coperation Council Countries (GCC), exchange rate volatility only affect significant positively on crude petroleum and investment especially in Bahrain, Kuwait, Saudi Arabia. While in Oman, Qatar and the United Arab Emirates, exchange rate volatility does not affect the macroeconomic fundamentals. (JEL: E00, F30, O53)
Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.
Just like in Bahrain, Kuwait, exchange rate volatility has a significant positive effect on
crude petroleum production (CPP). Reserve minus gold has a positive and significant impact
on inflation. Exports provide a positive and significant impact on reserve minus gold and
investment. Crude petroleum production has a significant positive impact on investment.
Investment in Kuwait has a positive and significant impact on reserve minus gold and crude
petroleum production. Economic growth provides a significant and positive impact on the
reserve minus gold and investment through the acceleration process.
Table 2 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Kuwait in the 1970-2011 period
Dependent Variables
Independent Variables
∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP ECTt-1
Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.
In the case of Oman, exchange rate volatility does not affect positively and
significantly on several macroeconomic variables such as reserves minus gold exports,
crude petroleum production, investment and gross domestic product. Unfortunately,
inflation data is not yet available on CD-ROM IFS IMF. Reserve minus gold has a positive
and significant correlation with export at α 1%. Export has a positive and significant
impact on reserve minus gold and economic growth. Crude petroleum production and
significant positive effectat α 10% on exchange rate volatility. Investments had a positive
impact and significant with minus gold reserve, export and economic growth. Economic
growth has a positive and significant impact on the gold reserve at α 1% level.
Table 3 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Oman in the 1970-2011 period
Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenbalues test (Johansen, 1994) Source: result calculated by author.
In Qatar, like in the United Arab Emirates (UAE), exchange rate volatility does not
affect any macroeconomic fundamentals. Reserve minus gold, exports, inflation, investment
has a significant positive effect on economic growth. Inflation has also a positive and
significant impact on reserve minus gold. Crude petroleum product has a negative effect on
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some macroeconomic variables such as reserves minus gold, exports, inflation, and
investment. The rate of economic growth has a positive and significant impact on
macroeconomic variables which three reserves minus gold, inflation, investment.
Table 4 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Qatar in the 1970-2011 period
Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.
In Saudi Arabia, exchange rate volatility has a positive and significant impact on
crude petroleum production and investment. This is reasonable because Saudi Arabia is the
second supplier of crude oil in the world after Venezuela and most investments are in sectors
Crude oil exploitation. Reserve minus gold, exports and investments have a positive and
significant impact on inflation. Crude petroleum production and significant positive effect on
the three macro-economic variables on exchange rate volatility, inflation and investment.
The rate of economic growth had a positive impact on the reserve minus gold, inflation,
investment.
Table 5 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Saudi Arabia in the 1970-2011 period
Dependent Variables
Independent Variables
∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP ECTt-1
Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.
In the United Arab Emirates, reserve minus gold positive and significant impact on
macroeconomic variables namely three on exports, investment and economic growth. Export
has a positive and significant impact on reserve minus gold and economic growth. Crude
petroleum production only has a positive impact on reserves minus gold. Investments have a
positive and significant impact on reserve minus gold and economic growth. While the rate of
economic growth and a significant positive effect on macroeconomic variables namely
reserve minus gold, investment and economic growth.
Table 6 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in UAE in the 1970-2011 period
Dependent Variables
Independent Variables ∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP
∆ER Vol - 0.24270 0.00298 na 0.04394 0.01848 0.00531
(0.6253) (0.9568) na (0.8351) (0.8928) (0.9423)
∆ RES 0.42982 - 11.0295*** na 3.25164* 6.79316** 18.2521*** (0.5164) (0.0026) na (0.0800) (0.0141) (0.0002)
∆ XPORT 0.01591 7.51968** - na 0.18297 2.42356 13.2708*** (0.9005) (0.0107) na (0.6719) (0.1321) (0.0012)
∆ INFLATION na na na - na na na na na na na na na
∆ CPP 0.87681 1.03040 0.63447 na - 0.36212 0.09091 (0.3550) (0.3170) (0.4320) na (0.5517) (0.7649)
∆ INV 0.00618 6.27457** 1.01366 na 1.61746 - 20.6831*** (0.9378) (0.0179) (0.3237) na (0.2129) (0.000000005)
∆ GDP 0.31111 14.0110*** 8.92102*** na 1.34336 3.97693* - (0.5807) 0.0007 (0.0061) na (0.2545) (0.0550)
Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) (4) Inflation data are not available Source: result calculated by author.
V. Conclusion
.
In general, in the Gulf Coperation Council Countries (GCC), exchange rate volatility only
affect significant positively on crude petroleum and investment especially in Bahrain, Kuwait,
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Saudi Arabia. While in Oman, Qatar and the United Arab Emirates, exchange rate volatility does
not affect the macroeconomic fundamentals. In the six of the Gulf Coperation Council Countries
(GCC), the linkage between macroeconomic variables with each other is positive and significant.
None of the negative relationship between one macroeconomic variable with other
macroeconomic variable.
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