Dwin­dling re­serves force South­east Asia to es­ca­late cur­rency war

The Pak Banker - - BUSINESS -

South­east Asia's dwin­dling for­eignex­change hold­ings are ex­ac­er­bat­ing the risk of a cur­rency war as pol­icy mak­ers have lit­tle choice but to al­low ex­change rates to weaken.

Malaysian re­serves have fallen 19 per­cent this year to $94.5 bil­lion, re­duc­ing the cen­tral bank's abil­ity to stem a 17 per­cent drop in the ring­git. In­done­sia's stock­pile, which shrunk 6.9 per­cent in the five months through July, may come un­der greater pres­sure af­ter Bank In­done­sia said Fri­day that it would seek to pre­vent the ru­piah, which is down 12 per­cent in 2015, from "over­shoot­ing."

Re­gional cur­ren­cies are re­treat­ing across the board as slid­ing prices for South­east Asia's com­mod­ity ex­ports co­in­cide with a yuan de­val­u­a­tion and the prospect of higher U.S. in­ter­est rates. Viet­nam re­sponded to the slump in China's cur­rency with a de­val­u­a­tion of its own. Credit Suisse Group AG says Thai­land is fa­vor­ing de­pre­ci­a­tion to re­vive an econ­omy ex­pand­ing at the slow­est pace in the re­gion af­ter Sin­ga­pore.

"We are deeper and deeper into a more and more wor­ry­ing cur­rency war," said Michael Ev­ery, the head of fi­nan­cial mar­kets re­search at Rabobank Group in Hong Kong. "In some cases, it's a de­lib­er­ate pol­icy. In oth­ers, it's not that they're look­ing for a cur­rency war, they're just look­ing to do­mes­tic fun­da­men­tals."

The ring­git led a drop in South­east Asian cur­ren­cies on Mon­day, fall­ing 1.1 per­cent as of 12:27 p.m. in Kuala Lumpur, ac­cord­ing to data com­piled by Bloomberg. The Philip­pine peso and the In­done­sian ru­piah lost 0.7 per­cent and Thai­land's baht was down 0.2 per­cent.

Malaysia's re­serves are enough to fi­nance 7.5 months of re­tained im­ports, the cen­tral bank said in a state­ment Fri­day. In­done­sia's re­serves of $107.55 bil­lion at end-July are suf­fi­cient to cover seven months of im­ports, ac­cord­ing to fig­ures from Bank In­done­sia. The drop in Malaysian re­serves was an­tic­i­pated and the cen­tral bank will set about re­build­ing them, Bank Ne­gara Gover­nor Zeti Akhtar Aziz said Aug. 13.

"We have high lev­els of re­serves and that is what re­serves are for, to rep­re­sent buf­fers dur­ing this pe­riod," she said Thurs­day. "We have held more than the amount of re­serves our coun­try needs, pre­cisely for re­ver­sals." Bank In­done­sia Di­rec­tor Nanang Hen­darsah said Aug. 5 that for­eign-re­serves am­mu­ni­tion needed to be con­served to man­age the cur­rency. The stock­pile is still ad­e­quate and there's a need to pre­vent the ru­piah over­shoot­ing more, he said on Fri­day.

"I don't see any signs that Bank In­done­sia is try­ing to hold the ru­piah at a cer­tain level," said Leo Ri­naldy, a Jakarta- based economist at PT Mandiri Seku­ri­tas, a unit of the coun­try's largest len­der by as­sets. It's more fo­cused on smooth­ing volatil­ity, he said. Other South­east Asian cur­ren­cies have dropped less than the ring­git and ru­piah in 2015. The baht is down 8 per­cent, Viet­nam's dong de­clined 5 per­cent and the Philip­pine peso has slipped 4.4 per­cent.

Us­ing the ex­change rate as a tool to boost trade could lead to un­in­tended con­se­quences such as trig­ger­ing com­pet­i­tive de­val­u­a­tions across the re­gion, Philip­pine Fi­nance Sec­re­tary Ce­sar Purisima said.

"Gains from de­val­u­a­tion would even­tu­ally be weighed against costs as in­vestors may view the weak­en­ing yuan as a one-way bet and stoke fears of cap­i­tal flight," he said. Thai­land's for­eignex­change re­serves fell 1 per­cent this year to $155.3 bil­lion as of Aug. 14, ac­cord­ing to cen­tral bank fig­ures.

"In terms of the amount of re­serves against the amount of short-term ex­ter­nal debt, Thai­land re­mains health­ier than coun­tries like Malaysia and In­done­sia," said Toru Nishi­hama, an emerg­ing-mar­ket economist at Dai-ichi Life Re­search In­sti­tute Inc. in Tokyo. "The Bank of Thai­land may al­low a weaker baht while the baht catches up with declines in other cur­ren­cies."

Viet­nam dou­bled the dong's trad­ing limit to 2 per­cent on Aug. 12, a day af­ter China slashed the yuan's fix­ing. Author­i­ties in Hanoi de­val­ued their cur­rency by 1 per­cent last week and ex­panded the band again, to 3 per­cent.

"Viet­nam has al­ready cracked," said Tim Con­don, the head of Asian re­search at ING Groep NV in Sin­ga­pore. It didn't have enough re­serves to sup­port the dong and we could see more de­val­u­a­tions this year, he said.

In­done­sian ex­ports have fallen in each of the last 10 months and dropped 19 per­cent in July from a year ear­lier, the most since Au­gust 2012. Thai ship­ments de­clined ev­ery month this year through June, while Malaysian over­seas sales fell in four of the first six months. That's flowed through to slower growth in the three economies. Thai­land ex­panded 2.8 per­cent last quar­ter and Malaysia's gross do­mes­tic prod­uct in­creased 4.9 per­cent, the least in al­most two years. In­done­sia grew 4.67 per­cent in the worst quar­terly per­for­mance since 2009.

Malaysia and In­done­sia are fac­ing the prob­lem that with less re­serves am­mu­ni­tion they have to be more pru­dent in how they de­fend their cur­ren­cies, said San­ti­tarn Sathi­rathai, a Sin­ga­pore-based economist at Credit Suisse. Thai­land "is more de­lib­er­ately just want­ing to cheapen the cur­rency in or­der to sup­port growth," he said. "The com­mon prob­lem they face right now is growth and the need to rely a lot more on the cur­rency."

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