Cur­rency volatil­ity up­sets Asian growth plans

The Pak Banker - - BUSINESS -

Faced with fall­ing ex­ports and de­fla­tion risks, it suited much of Asia to let their cur­ren­cies drift lower, un­til China's abrupt de­val­u­a­tion trig­gered a tide of volatil­ity that is up­set­ting not just their cur­rency man­age­ment but also their growth strate­gies.

China's 2 per­cent de­val­u­a­tion on Aug. 11 added to ev­i­dence that its econ­omy was strug­gling, and over­seas it caused a rip­ple of panic that a cur­rency war was in the off­ing. Cur­ren­cies and stock mar­kets in the re­gion have since tum­bled to mul­ti­year lows, pulling global mar­kets in their wake, as wor­ries about China played into broader con­cerns about global growth, a col­lapse in com­mod­ity prices and the tim­ing of a rise in U.S. in­ter­est rates.

Sud­denly, in a re­gion still haunted by mem­o­ries of desta­bil­is­ing cur­rency de­val­u­a­tions dur­ing the 1997/98 Asian cri­sis, the op­tion of a gen­tly slid­ing cur­rency has been taken off the ta­ble by a freefall that threat­ens a desta­bil­is­ing flight of cap­i­tal, sharp mar­ket swings and a spike in the cost of funds. Cen­tral banks from South Korea to Thai­land have de­ferred rate cuts, which would put fur­ther down­ward pres­sure on vul­ner­a­ble cur­ren­cies, with the re­sult that growth and stim­u­lus plans are likely to take a back seat.

Bank In­done­sia kept its main in­ter­est rate un­changed at a pol­icy re­view last week, mak­ing clear cur­rency sta­bil­ity is fore­most among its pri­or­i­ties, even though the econ­omy has slowed to its weak­est pace in six years and in­fla­tion is fall­ing. "We will not fol­low com­pet­i­tive de­val­u­a­tion," In­done­sia's cen­tral bank Gover­nor Agus Mar­to­war­dojo said this week. The cen­tral bank said it was ag­gres­sively in­ter­ven­ing in the ru­piah mar­kets and even mop­ping up short-term cash to stop in­vestors spec­u­lat­ing against the cur­rency.

In­done­sia is par­tic­u­larly vul­ner­a­ble af­ter a sharp loss of 14 per­cent in the ru­piah against the dol­lar so far this year, low forex re­serves and a heavy dose of for­eign money in its debt mar­kets. But even cen­tral banks such as In­dia's and Sin­ga­pore's are un­likely to be able to cut rates while mar­kets re­main volatile.

"Asian author­i­ties have got to be will­ing to stom­ach high in­ter­est rates for a while," said Cliff Tan, head of east Asian mar­kets re­search at Mit­subishi UFJ in Hong Kong. Cap­i­tal Eco­nom­ics an­a­lysts Gareth Leather and Daniel Martin said in a note to clients that Malaysia and In­done­sia might even be forced to raise rates "if the cur­rency sell-off be­came a rout".

Citibank has al­ready cut its Asian growth forecast for 2015 to 6 per­cent from 6.1 per­cent, cit­ing the volatil­ity as­so­ci­ated with China's weak­en­ing of the yuan, its slow­ing growth and the pos­si­ble ad­verse pol­icy re­ac­tion among other coun­tries. It cut its forecast for Thai­land's growth to 2.7 per­cent from 3.5 per­cent.

Though Thai­land has ad­mit­ted its econ­omy wil be weaker than forecast and had wel­comed de­pre­ci­a­tion in the baht as a rem­edy, its cen­tral bank voted to keep rates steady in Au­gust and al­luded to fi­nan­cial mar­ket volatil­ity as a fac­tor. The baht hit its weak­est lev­els since 2009 this week and most of the baht's 8 per­cent losses this year against the dol­lar have been in the past cou­ple of months.

"It's clearly a bit un­com­fort­able. I would ex­pect them to start to think this is un­wel­come volatil­ity rather than welcome de­pre­ci­a­tion," said Richard Yet­senga, global head of fi­nan­cial mar­kets re­search at ANZ in Syd­ney.

South Korea's cen­tral bank turned swiftly de­fen­sive of the won this week as it hit its low­est in nearly four years, selling dol­lars to slow the won's de­cline. That's a turn­about from its tac­tics ear­lier this year to weaken a cur­rency that had be­come less com­pet­i­tive against Ja­pan's sharply weaker yen. It also kept rates un­changed this month, two days af­ter China's de­val­u­a­tion.

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