Southeast Asian Currencies: Stronger Than They Look

Covid-19 isn’t biting as badly on currencies as expected

It is axiomatic that stock and currency markets have minds of their own and often appear moved by sudden sentiments than changes in the facts. But ignorance on the part of so-called reliable information sources such as Bloomberg can play a significant part in increasing volatility.

Take, for example, the issue of Asian emerging market currencies to which Bloomberg writers seem to have taken a particular dislike. On June 4 Bloomberg reported that a shift in sentiment was driving capital out of Asia to Latin America due to concerns that the China-US confrontation would help one and hurt the other. On June 5, the value of the Philippine peso rose to 49.8 against the dollar, its highest level in more than a year.

Likewise, the Indonesian rupiah almost regained the 13,900 level to the US dollar compared with 16,000 just a few weeks ago. The Thai baht has shown a similar bounce-back, although not to the exceptionally strong levels seen in late 2019 before the virus killed tourism.

Even the politics-bedeviled Malaysian ringgit has staged a significant recovery even if still well below year-ago levels. Contrary to “outflow” talk, Asian currencies have mostly been rising steadily from late March nadirs

Just a few weeks ago, Bloomberg was using some Standard & Poor’s data and a debt downgrade to imply an impending crisis for Indonesia due to its state enterprise debts and possibly inadequate level of foreign reserves to short term debt. Since then the rupiah has rebounded by 19 percent and likewise the bond and stock markets as it has become clear that developing Asia’s situation was nowhere near as bad as had been suggested.

A broader measure of confidence is the value in US dollars terms of the Asian Bond Fund listed in Hong Kong and Singapore. It is a portfolio of local currency-denominated, medium-term government bonds including those of China, Korea, Indonesia, Thailand, Malaysia, Hong Kong, Singapore and the Philippines. It currently trades at about U$118.8, almost a record high and 11 percent above its level in late March but still yields 2.6 percent. With inflation low everywhere for now, Asian bonds have been offering a superior real return against developed countries where rates have been driven to near zero by central bank buying.

The strength of the currencies of the less-advanced Southeast Asian countries may seem a particular surprise. However, data so far suggests that their ability and will to print money to support their economies is rather less than in the US and Europe. Consciousness of debt levels ingrained during the Asian crisis 1997-99 still survives. Mechanisms to make payments to their huge numbers of self-employed workers is also weak.

As for the trade balances, evidence so far suggests that imports have been slowing faster than exports. All of the Southeast Asian economies are net importers of oil and prices of some of their leading commodity exports such as palm oil, rubber, rice and copper have so far proven relatively resilient even if tourism has collapsed and, for the Philippines, remittances are down.

Revival of consumer demand and capital goods imports could soon cause deterioration in trade balances. Meanwhile, it is anyone’s guess if and when export demand for garments, shoes and electronic components will revive, tourism returns and whether the oil price collapse will see a permanent reduction of remittances from the Middle East.

The strength of Asian currencies could yet be reversed if China lets the yuan slide to retaliate against the US. But the yuan is not the only story in Asia. The yen, NT dollars and Korean won are all showing that strength is better underpinned by fundamentals than their counterparts in the US and Europe.