South-east Asian currencies are trading near their lows for the year against the surging dollar, with the Malaysian ringgit and Thai baht leading the decline, as governments and businesses in the region worry about the economic impact of the depreciation.
The cheaper currencies are bringing higher import costs. Regional exporters, on the other hand, are struggling to take advantage of the slide, as uncertainties prevail in big markets, especially China.
While a weaker currency generally benefits exporters and tourism, a sustained fall risks triggering capital outflows. The recent uptick in oil prices has also raised fears of faster inflation.
“A combination of a higher dollar, a weaker Chin[ese economy] and higher oil prices [has] become a dangerous cocktail for most of the ASEAN economies,” Charu Chanana, market strategist at Saxo Markets in Singapore, told Nikkei Asia.
The ringgit and baht are the worst performers against the dollar in south-east Asia this year, falling 6.9 per cent and 4.4 per cent, respectively, through October 13. The Vietnamese dong is down 3.4 per cent, while Singapore’s dollar and Indonesia’s rupiah have held up relatively well, slipping 2.1 per cent and 0.7 per cent, respectively.
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The broad depreciation comes on the back of strong US economic and wage growth, which has pushed Treasury yields and the dollar higher. The resilient US economy has led some investors to conclude the Federal Reserve will keep interest rates higher for longer to fight inflation.
Higher interest rates in the US attract investors seeking better returns, encouraging capital outflows from south-east Asia and weakening regional currencies. In particular, the Malaysian ringgit hit a 10-month low of 4.729 against the dollar on October 4.
Malaysia’s currency has been hit by a widening interest rate gap with the US. On the back of moderating inflation, at 2 per cent in August, Malaysia’s central bank has tightened only once this year, in May, when it lifted the benchmark rate a quarter point to 3 per cent. By contrast, the Federal Reserve has lifted the US overnight rate to between 5.25 and 5.5 per cent.
At the same time, the ringgit has been hurt by Malaysia’s greater exposure to the Chinese economy, which is seeing disappointing growth. “The Malaysian ringgit moves in lockstep with the Chinese yuan,” said CIMB Group’s Intan Nadia Jalil. Weaker prices for commodities such as palm oil and natural gas, which make up a big share of Malaysian exports, are another negative factor.
Malaysia’s prime minister Anwar Ibrahim, who also serves as finance minister, on October 10 said the government was “exploring initiatives” to trade in local currencies to reduce its reliance on the dollar for trade and investment.
“To entirely end reliance on the US dollar will be difficult, but Malaysia will be more active and aggressive in the use of the ringgit” for trade, Anwar told the parliament. Malaysia has started using local currencies in transactions with Indonesia, Thailand and China.
Concerns in Malaysia about a sharp dollar rally are echoed by neighbours such as Thailand, where the local currency hit a 10-month low of 37.07 baht a dollar on October 3.
Analysts at the Kasikorn Research Center said foreign investors have also sold the baht due to a lack of confidence in the economy and concerns over Thailand’s fiscal discipline, particularly the government’s contentious digital money handouts, which it is estimated will create up to 560bn baht ($15bn) in new public debt.
The Thai currency is not only weaker but also volatile, raising concerns for exporters, which are unlikely to be able to take advantage of the depreciation. The volatility of the baht makes exporters reluctant to quote prices as they fear incurring exchange rate losses.
The Joint Standing Committee on Commerce, Industries and Banking, which groups some of Thailand’s largest industries, said the government “should try to stabilise” the local currency in an acceptable range that will support exports.
In Indonesia, a weaker currency typically helps export-oriented companies such as coal miners and palm oil producers. But Indonesia’s trade surplus has trended lower this year, undermining support for the rupiah.
Although Indonesia posted a $3.12bn trade surplus in August, exports fell 21 per cent in value terms from a year earlier to $22bn, weighed down by lower commodity prices and weaker demand from China.
Meanwhile, the Philippine central bank has not changed its tone on the peso’s depreciation, as central bank governor Eli Remolona believes a hawkish stance will benefit the local currency. The central bank has traditionally preferred a weak peso because it raises the value of remittances from overseas workers.
At the same time, a weaker currency means disproportionately higher costs for importers, especially for the energy and other inputs needed to manufacture products for export.
Vietnam, for example, has the highest rate of imports and exports as a share of gross domestic product in the region, after Singapore. Analysts say the higher costs hurt even more now because this is a key period for imports, which have been rising steadily since the summer as manufacturers gear up for the Christmas season.
Despite this, the Vietnamese central bank became the first in Asia to cut interest rates this year. It began doing so in March in hopes of “removing the difficulties for the economy.” Vietnam wants to encourage lending and business activity amid lukewarm global demand for its exports, a property crisis and mass lay-offs.
“While these measures were introduced to bring relief to the property sector, there is a risk of a knock-on effects on energy imports,” said Nick Ferres, chief investment officer at Vantage Point Asset Management, adding that coal prices were especially affected. “We see the energy sector in Vietnam feeling the pinch from high exchange rates, with a possibility of passing on these costs to consumers.”
Richard Bullock, a senior research analyst at Newton Investment Management, said for now, he believed the currency declines were “manageable” for the region. “Balance of payments are generally healthy across the region, and foreign exchange reserves are sizeable enough to cushion short-term capital outflows,” Bullock told Nikkei Asia.
However, higher oil prices could weigh on regional economies, which have been experiencing lower inflation than in the US and Europe. In September, Brent crude traded above $90 a barrel for the first time since November 2022, triggered by supply cuts from Saudi Arabia and Russia.
In a research note on October 3, Morgan Stanley said it expected oil prices of more than $90 a barrel through the middle of 2024. The investment bank, which has stayed bearish on Asian currencies, warned the higher oil price “could have a decent impact” on the region’s inflation.
“The market might underestimate the risk of Asian central banks turning more hawkish should inflation surprise the market on the upside going into 2024,” the note said.
Additional reporting by Norman Goh in Kuala Lumpur, Apornrath Phoonphongphiphat in Bangkok, Lien Hoang in Ho Chi Minh City, Ramon Royandoyan in Manila, Erwida Maulia in Jakarta and Echo Wong in Hong Kong
A version of this article was first published by Nikkei Asia on October 16. ©2023 Nikkei Inc. All rights reserved.