New | No respite in sight for Asian currencies
Deteriorating global trade, increasing downside risks to growth and a strengthening US dollar set to put more pressure on regional currencies
There is no reason to expect much respite for Asian currencies that have weakened versus the dollar in the past few quarters, as the underlying conditions that underpinned the move remain solidly in place.
"Growth in developing Asia is stuttering amid diverse challenges confronting economies globally," said the Asian Development Bank's Outlook 2015. In contrast, data showed US gross domestic product (GDP) expanded at a smart 3.9 per cent on an annualised basis in the second quarter of this year.
Whether or not that pace of GDP growth means the US economy could tolerate a small rise in rates, the contrast with "stuttering" Asian economies is glaring, perhaps supporting the case for still looser monetary policy in much of Asia and thus feeding back into further Asian currency weakness against the dollar.
Taiwan's central bank has already acted, reducing its benchmark rate to 1.750 per cent from 1.875 per cent last month, its first cut since 2009, in an attempt to bolster economic growth and after poor export data for August.
Annual export orders fell 8.3 per cent in August, said Taiwan's Ministry of Economic Affairs, far below analysts' expectations, but with the devil in the details. Orders were down 14.8 per cent from China, 12.1 per cent from Europe and 17.1 per cent from Japan, with even orders from the United States only up a mere 0.6 per cent.
That mirrored the situation in Singapore where non-oil domestic exports fell 8.4 per cent in August compared to a year earlier, said trade agency International Enterprise Singapore, with falls in exports to China and Europe, as in Taiwan's case, being notable.
Given that the Monetary Authority of Singapore's (MAS) key monetary policy focus is the exchange rate, not interest rates, perhaps the MAS might see merit in guiding the Singapore dollar slightly weaker when it convenes its mid-October policy meeting.
Elsewhere, Thailand's exports in August dropped 6.69 per cent from a year earlier, the Commerce Ministry said, the eighth consecutive month of decline and despite a significant weakening of the baht this year.
It remains to be seen if the new Bank of Thailand governor, Veerathai Santiprabhob will feel the Thai central bank should cut rates from the current near-record low of 1.5 per cent.
As for China, its own exports fell 5.5 per cent in August, compared to the same month last year. Even more strikingly, and with ramifications for everyone who sells to China, its imports shrank 13.8 per cent, the 10th straight month it has declined.
The challenging international trade situation, in a circumstance where, currently, inflationary pressures are subdued, should encourage Asia's policymakers to both keep monetary policy loose, or looser, to encourage domestic consumption, but in the knowledge that accompanying local currency weakness may support export potential.
Noting that "global trade has deteriorated further and downside risks to growth have increased" the Reserve Bank of India "front-loaded policy action by a reduction in the policy rate by 50 basis points" to 6.75 per cent, a 4-½ year low.
But local currency weakness can bring other issues to the fore, especially where local corporations have taken on a large chunk of foreign currency debt, predominantly dollar-denominated, that suddenly becomes harder to service out of local currency receipts which no longer buy quite so many greenbacks.
"A strengthening US dollar poses a threat to Asian companies with large foreign currency exposure, with data showing that the share of foreign currency debt among firms in Vietnam, Sri Lanka, and Indonesia exceeds 65 per cent," said the ADB.
That potentially has implications for Japan whose banks have been huge providers of foreign currency loans to other Asian economies in the last few years, economies whose lights no longer shine quite so brightly.
Meanwhile, as China moves towards its new normal economic model, its declining appetite "for energy, metals and other commodities, and soft global prices, is a worry for a number of developing Asian commodity-focused export economies including Azerbaijan, Brunei Darussalam, Indonesia, Kazakhstan, and Mongolia, " said the ADB.
Kazakhstan has already substantially devalued the tenge currency while Indonesia has turned to macro-prudential measures in an attempt to stabilise the rupiah, albeit at a much lower level.
Beijing may have been awarded the 2022 Winter Olympics but for Asian currencies the downhill race is already in full swing and the finish line is nowhere in sight.
