Even if Asian currencies are at multi-year lows as emerging market assets are swept down on global growth concerns, the chances regional authorities will follow Hungary with a hefty rate rise to support their foreign exchange rates are at best remote.
Two days after holding rates steady, Hungary’s central bank ramped up rates by 3 percentage points on Wednesday, deciding to support its currency that was close to a record low against the euro and risk a further blow to its economy. Asian central banks face a similar dilemma in choosing how to support their currencies without damaging economic growth.
The financial storm that has seized markets globally is deepening fears of recession in developed countries -- the main demand centres for the export engines of emerging nations and in particular Asia. On Thursday, a rout of emerging markets globally continued.
The Indonesian rupiah hit its lowest level against the dollar in nearly 3 years. The Philippine peso dropped to its weakest level since early 2007, while the Malaysian ringgit fell to its lowest level in nearly two years.
“Asia has the highest trade/GDP exposure of any emerging market region. The direction of both monetary policy and currencies is clear - rates to be cut and currencies to weaken across the board,” said Callum Henderson, head of FX strategy at Standard Chartered Bank. Most Asian currencies have fallen less than 1% daily, unlike the heavily battered Brazilian real and Mexican peso, which fell 6% and 5.8% respectively on Wednesday. After Hungary’s surprise, big rate rise, there was no indication Asian policy makers would do something similar.
Instead, Asian central banks have followed a policy of intervening to cushion the pressure on their currencies. Indeed, the Philippine central bank was suspected of intervening on Thursday, traders said. Asian central banks can afford to intervene because of the massive foreign exchange reserves they have built up to shield their currencies following the Asian financial crisis a decade ago, when investors pulled their capital out of the region.
Export-driven Asia would even benefit from some currency depreciation at a time when the risks of recession in Asia’s main export markets are as high as that of the heavy capital outflows triggered by the credit crisis, analysts reckon. “With external demand falling sharply, Asian authorities will have to place much more importance on supporting domestic demand via rate cuts and fiscal spending,” said Henderson.
At the same time, Asia isn’t beyond announcing sudden draconian foreign exchange. Indonesia, for example, ramped up its interest rates by 4 percentage points in the space of just four months in 2005 when the rupiah was falling rapidly.
Thailand introduced capital controls in 2006, aiming to control inflows from pushing its currency up too quickly. The highlight of the Asia financial crisis in 1997/98 was Malaysia’s decision to peg its currency to the dollar to thwart the capital flight that was bringing several economies to their knees.
While Hungary’s forint has fallen 33% against the dollar since the global financial crisis intensified in mid-July, there have been falls of a similar magnitude in the Asia-Pacific in the Aussie dollar and Korean won. “Never underestimate the dovishness of Asian central banks,” said Sean Callow, a strategist at Westpac Bank. “But Hungary is a chilling reminder of how a currency rout can force policymakers to switch to crisis mode to protect the currency rather than support domestic economy.”
Callow, however, points out that Hungary had a whopping current account deficit, which Reuters data puts at nearly 5% of gross domestic product. In contrast, most Asian countries run trade surpluses, and exports also account for between 100 to 200% of GDP in the open economies such as Singapore, Malaysia and Hong Kong.
India runs a twin current and capital account deficit, yet its central bank has cut banks’ reserve requirements sharply and also the policy rate, suggesting policy makers are intently fixed on underpinning growth. China, Taiwan, South Korea, Hong Kong have also cut rates to try to support growth. “Asia is a very different to Central and Eastern Europe, much more global, and less of a derivative on European recession,” said Henderson. “The bottom line is, in this environment it is ludicrous to be hiking rates to defend your currency - as foolish as the ERM crisis.” (Reuters)