Movement Effects of Portfolio Investment against Real Effective Exchange Rate Stability in ASEAN

Abstract

Effort to attract foreign investment in form of portfolio is very important for developing countries. However, the portfolio investment establishment policies of financial liberalization in ASEAN can lead to real exchange rate appreciation and may have the effect of exchange rate competitiveness, harm exports and economic growth fluctuation. This research was intended to identify the performance and comparison of the movement of portfolio investment and foreign direct investment and to analyze portfolio investment linkage and real effective exchange rate in ASEAN. The analysis results by Generalized Method of Moment (GMM) provided an illustration that Indonesia, Malaysia and The Philippines had a positive significant impact on the real effective exchange rate stability. Meanwhile, Singapore and Thailand had a negative insignificant relationship. Portfolio investment flowing on the free floating exchange rate system causes an appreciation of real effective exchange rate which affects the rising price of domestic assets in the foreign exchange market. Government intervention in the determination of exchange rates on the floating exchange rate system causes less productive mechanism of intercountry trade. However, portfolio investment flows can be easily controlled, so the real effective

exchange

rate becomes uncompetitive against the currencies of other countries which are the main trading partners.