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Adopting Single Currency in ASEAN Region: Analysis

Question 1

1. 1 Introduction

Euro () money was made in 1957 and the solitary currency provides benefits to the euro region. For an example, Euro currency eradicated exchange costs and fluctuation risks. It gives stability of financial to the euro region, so that it allows government to own better long-term planning future. In addition, economic steadiness also really helps to reduce doubt and increase investment, so that it gives benefits to the businesses as well. As businesses gain advantages from economic steadiness, it also give advantages to the citizen as it provides more job and better quality careers. Furthermore, with a single currency, it is less high-risk plus more cost-effective when conducting business within the euro area as there is certainly one large integrated market. Besides that, it encourages cross-border trade and all kind of purchases as the purchase price can be compare easily when using the same money. (N/A, 2014) Thus, the successful of putting into action a single currency of euro () happen the interest to the topic of whether other region can successfully adopting common methods. Specifically for ASEAN region as ASEAN is one of the spot that economic acceleration is a lot positive. However, there's always a question whether ASEAN can efficiently implemented a typical currency, as euro currency in European Union. We must go through the challenges of adopting a single money for ASEAN economic in order to identify whether ASEAN region would work to make such solutions.


1. 2. 1 Intra-Regional Trade

First of all, substantial intra-regional trade is one of the key challenges to look at single currency for Asia. Big level of inter-transaction within Asia will enhance the money of countries in Asia. However, countries in Asia done more trading with countries where outside the region, roughly 75% more than countries in Asia. Therefore, Asia countries are worried for their currencies stability against international currencies if indeed they adopt an individual currency. Asia countries can import more goods and services from countries outside the region than intra-regional countries only when their total exports is higher than total imports. (Lee, 2009) Last but not least, Asean region have to increase their exchange within their regional area before execute a single money to be able to stabilize Asean currency.

1. 2. 2 Economic Development

Besides that, Asean countries have different economical development, their GDPs and per capita income levels are different one to the other countries. For instance, per capita income of Singapore is about 350 times more than poor country like Myanmar's. In addition, countries in your community area like China, India and Indonesia are area of the largest countries in the world, yet they show big income differentials. It really is difficult to keep a similar financial management with such a large income differentials. (Lee, 2009)

1. 2. 3 Monetary System & Market Integration

Moreover, financial integration is another big problem to adopt solo money for Asean region. Monetary integration make reference to central banking companies and governments of the spot countries would have less control over monetary regulations and fiscal policies. However, some countries are just not ready for such integration as economic policy can be an important tool to encourage economy. For example, countries cannot use tools such as interest levels to handle cyclical needs. (Lee, 2009) For further explanation, every country have different economic objectives, for a good example, some countries in your community are troubled recession plus some countries are enduring an inflation. Thus, expansionary regulations are needed for some countries to address recession, and contractionary plans are needed for some countries to address inflation, but ASEAN central bank can only apply one monetary insurance plan at onetime. Therefore, there's a huge problem among the list of union. Furthermore, countries like Japan and Korea such developed country have maintain small restrictions on labor freedom. However, Governments of region countries have to execute policies which allow for greater range of motion for labor and capital across within the region borders to be able to manage one common money. However, it is hard to transfers large-scale of learning resource across national borders as at the union level, governments will have less centralized budget. Furthermore, Asean is desire to create restrictions on the fiscal deficits for every country due to experience from Western. Hence, country can only just respond to country specific shocks by using limited fiscal plans. (Madhur, 2002)

1. 2. 4 Financial System

Other than that, a strong financial systems and market segments are required to manage a money. It required a strong institutional support as well, but Asean currently does not have such institutions to deal with those threat to the financial sector. (Lee, 2009) Unlike Europe, Europe have established a variety of companies such as Western Commission, Western Council and the Western Central Bank to control local reserve. Somehow, it is a huge challenge to Asean to develop such infrastructure. (Madhur, 2002)

1. 2. 5 Macroeconomic Disturbance

Furthermore, the price of adopting a single currency is local central bank or investment company have to give up the power to regulate monetary policy and the money have to regulate by ASEAN central lender. However, every countries have different rates of inflation as economical conditions will vary. Therefore, it is hard for ASEAN central lender to regulate all the ASEAN area by utilizing a policy and problems may occur if a couple of countries failed to adjust interest rates to meet the demands. For a good example, the lessons from European debt crisis, EU is currently speaking about whether Greece should go back to its own monetary coverage that regulated by Greek Central Loan provider and leave the Euro area. Meanwhile, there are same situation in the ASEAN as ASEAN nations have two different financial power groups. For instance, the first groups are those countries that are advanced economies such as Brunei, Malaysia, Indonesia, Thailand, Singapore and Philippines. The next groupings are those nations that happen to be least developed such as Laos, Vietnam, Myanmar and Cambodia. This two group have huge difference in conditions of income per capital. For an example, income per capital of Singapore have roughly 350 times more than Myanmar. In addition, Myanmar have high inflation rates and Laos have high unemployment rates. Therefore, it is difficult to address the issues with a same financial insurance plan as the differentials of inflation rate and unemployment rate between one country and another. (Sidjaja, 2011)

Impact of solo currency to Asean economy

1. 3. 1 Positive implications

On the other side, implement an individual money for Asean financial community could have bring positive effect to the Asean region. Eliminate deal costs is one of the great things about implementing one common currency. With an individual currency, countries or businesses can save purchase cost when trading within the region as the price of exchanging currency is no longer needed. For instance, Malaysia individuals can travel or do investment in region area like Singapore, Thailand, Japan and others by using Asean money. Exchange costs are removed as exchange for other currencies are not needed when trading within region area. Therefore, it helps to market trade within local area as it is better to trade by using a single currency. In addition, single currency also allow businesses to obtain better planning as it eliminated the fluctuation cost. Normally, businesses could incur high cost by fluctuation cost. For a good example, a firm in Malaysia decide to sign a shipping and delivery service from company in Singapore with a five 12 months package which cost 10, 000 SGD monthly. At that time, the exchange rate was 1. 00 SGD to 2. 00 MYR, so the company in Malaysia have to pay 20, 000 MYR monthly. However, SGD have loved against MYR as the exchange rate was 1. 00 SGD to 2. 7 MYR, which direct result company in Malaysia have to pay 27, 000 MYR because of the fluctuation cost. Hence, investment would boosts with using single currency as companies can have a better business planning. Besides that, single currency makes it easier to compare price of products and services across countries in regional area, which encourage more trading within local area. As a result, raises in competition, and financial efficiency upgraded. (Sanno, 2010)

1. 3. 2 Cost of adopting Single Currency

The biggest cost of implementing a common currency is countries have to stop their countrywide sovereignty. They are no longer in a position to implement own financial insurance policy in their country. This could direct result some problems to certain countries in the region as monetary coverage only can implemented once at onetime. As the exemplory case of European Union, European central lender cannot address the problems of Greece which suffering of high inflation because if European central bank put into practice a contractionary plan intend to dwelling address high inflation in Greece, it could lead another negative result to other countries in European countries like Spain where in fact the country currently have problems with recession and having high unemployment rate.

1. 4 Conclusion

To summarize, adopting an individual currency have benefits and drawbacks. A single currency would promotes economic growth of Asean region as transaction costs and fluctuation costs are taken away which boosts trade and investment within the spot and attract investors from outside the region. However, countries have to give up for their nationwide sovereignty as economic plans will be applied by Asean Central Lender. Despite that, there are several troubles that Asean region have to deal with to be able to implement a successful single money such as intra-regional trade, economical development, economic systems & market integration, financial system and macroeconomic disturbance. Through the view of those challenges, Asean region is merely not ready yet to put into action a single currency as Asean intra-regional trade is not strong enough. In addition, economic development in the region have too large differentials, for illustration, Singapore compare to Myanmar. Besides that, some countries like Myanmar and Laos aren't ready to quit their national sovereignty yet because Myanmar happens to be battling high inflation rates and Laos is troubled high unemployment rates. Moreover, Asean still need time to develop a strong financial system to meet the infrastructure like in EU. Lastly, Asean is also not ready to package with macroeconomic disturbance yet as some countries are having high inflation rates, whereas some countries are experiencing high unemployment rates. Thus, it will not be a wised move to adopt a single currency for Asean as member countries in Asean still have a lot in unusual. As the lessons from Euro crisis, issues in a vulnerable market country could impact the strong performing country. (Penh, 2012) Asean should take up a single money in no dash, otherwise similar effects would occurred again in Asean region.

Question 2

2. 1 Introduction

The three key macroeconomic factors are inflation, unemployment, and forex. Policymakers always put into action many kind of regulations to cope with those macroeconomic factors. These three key macroeconomics factors could lead to further global financial crisis if policymakers do not carried out proper policies to address. For instance, when economy come to the peak, high inflation may strike on the market. Therefore, policymakers have to use contractionary policy in order to deal with high inflation. Alternatively, when current economic climate is suffering from recession, high unemployment rate would take place. So that, policymakers have to put into action expansionary policy to handle high unemployment rate. Furthermore, when economy comes to globalization, fluctuation of exchange rates might be too high. Hence, policymakers have to used certain currency reserve to stabilize the exchange rates. However, policymakers sometime just didn't see through illusion of business pattern, therefore lead to financial meltdown. Stock markets are necessary to financial crisis as when stock markets collapse, countries could have problems with financial meltdown. Macroeconomic factors such as inflation, unemployment, and forex would affect the company value, stock results and risk evaluation.


2. 2. 1 Inflation

Inflation means that overall prices increase sustainably. Inflation does indeed affect organizations' performance as inflation incur costs on organizations. While using inflation, organizations have to spend more income on raw materials. For a good example, Air Asia need to pay more money for the jet fuel if the price tag on jet fuel goes up. In addition, staff demand more wages as inflation reduce their standard of living. Jet fuel and wages are two major costs for Air Asia. Boosts in cost of jet fuel and wages also imply that cost of Air Asia increased. Therefore, Air Asia would increase price of airline tickets as well to preserve their success. In this example, cost of the assistance increased and price of the services also increased. However, demand for flight tickets decrease because of the theory of demand, as price goes up, demand boils down. Hence, income of Air Asia decreases. In addition, the danger goes up because income of Air Asia may not able to manage to pay loans and costs. As risk rises, default risk rises as well. Besides that, provision of doubtful credit debt boosts because debtors might also unable to settle your debt as revenue of debtors are also decreases. As the effect, share price boils down. As the share price comes down, firm value also decreases. Moreover, inflation may possibly also affect stock earnings. Stock returns will be the dividend paid by issuer to the stockholders. Most probably grow of inflation would decrease the stock comes back as drop in earnings of company. Company are able to pay same amount of dividends while struggling inflation only when company can ensure their income are keeping speed with the expansion rate of inflation. However, it is unlikely as the majority of the revenue of companies would decreased. (n/a, 2012) Furthermore, inflation also have an impact on the risk analysis of any company as inflation brings different amount of risks. First of all, when the market is having high inflation rates, central bank or investment company would implemented contractionary policy to address inflation. Therefore, level of money source in market would decreases and therefore, low purchasing vitality in market. Hence, companies should give attention to market in in foreign countries rather than domestic country. For instance, Air Asia should offer more of their flight services to other strong purchasing power countries like China, Singapore, Korea while others. As market is suffering from high inflation, income of companies are anticipated to lessen. Therefore, company should have decrease their cost. For a good example, Air Asia would need to cut numbers of staff and sealed certain area in airport. Furthermore, companies should not only concentrate on offering a sole service or product to be able to diversify the chance. For instance, Air Asia not only offer airfare services but also reselling free of tax chocolate, alcohol, and more product. Therefore, when the inflation hit on the type price of jet fuel, Air Asia continues to be in a position to gain some earnings. Share price of companies are expected to drop when strike by inflation. Hence, the opportunity of shareholders sell most of his shares are high, so companies must have prepared funds to buy back those share to maintain the share price as much as possible; otherwise the company would panic.

2. 2. 2 Unemployment

Unemployment identifies people who currently do not have employment, but prepared to work. Unemployment bring many effects on firms. To begin with, high unemployment indicate there is less disposal income in market. People don't get income when they do not have a job. Hence, the spending electric power in the economy is weak. On the other hand, cost of pay would decrease as there are too much surplus of labor supply throughout the market when there is certainly high unemployment. Reason drop of salary is as a result of competition for employment. People is willing to accept lower wages to get a job. Decreases in expense of wages is one of the component to progress profits, however in high unemployment situation, revenue and earnings of company would show up as the purchasing vitality is low. Therefore the threat of company boosts as company may not able to relax the liability because revenue of company is insufficient to pay. Hence, default risk of company increases as goes up of risk of company. Furthermore, provision of doubtful personal debt might increases as others might also face similar troubles which they can't afford to pay their personal debt. At the end, the show price of company would falls as a result of poor business performance of company. Show price of company comes lead to company value falls. Besides that, unemployment also affect stock returns, when suffering from depression, the majority of the companies wouldn't normally pay a single sen with their shareholders as they have to accumulate up their capital to deal with uncertainty or established to make development. So that, stock profits are zero at this situation. Besides that, unemployment also impact the risk evaluation of your country. High unemployment involve some specific hazards. First, central lender would applied expansionary policy to cope with high unemployment. At the same time, government is wanting to solve unemployment problem as quickly as possible because taxes get by government comes and national economical is weak. At this stage, central standard bank may decrease the interest levels which plan to provide out money to businesses for expansion and therefore, deploy labor. Furthermore, pay of labor is cheap. Therefore, the risk to expand the firms of organizations are low as organizations can enjoy cheap interest rates and cheap labor salary. Additionally, it is risky to provide normal or luxury goods and services since most of the folks can't afford to enjoy such goods and services. Instead, organizations should offer more second-rate goods which most of people are able. Besides that, companies should work with security guards in the working area to be able to eliminate risk of crime. Such sociable problems occurred frequently, particularly when depression. For example, every Rolex retail shop have deploy at least two security guards to keep their shop safe and steer clear of robbery. (Riley, 2009)

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