South-East Asian currencies start to slide

June 14th, 2008 - 11:40 am ICT by IANS  

Bangkok, June 14 (DPA) When inflation goes up, currencies tend to come down, economists say. That rule of thumb has proved true in South-East Asia this month which has seen inflation across the region pushed to the highest levels in a decade by rising fuel and food prices.

In May, year-on-year inflation peaked at 7.6 percent in Thailand, 9.6 percent in the Philippines, 10.4 percent in Indonesia and a whopping 25.2 percent in Vietnam, leading to depreciations against the not-so-mighty dollar of the Thai baht, the Philippine peso, the Indonesian rupiah and, most recently, the Vietnamese dong.

Vietnam’s State Bank Wednesday lowered the official exchange rate of the Vietnamese dong almost two percent, while raising the prime interest rate from 12 to 14 percent to stem inflation.

Further depreciations are anticipated in Vietnam and throughout South-East Asia in coming months.

“The big issue in my mind is, are they going to be able to get away with just gradually devaluing the currency, or should they just go ‘whack’ and do 20 percent at one time?” said Peter Ryder, CEO of asset and real estate group Indochina Capital, referring to Vietnam’s central bank.

Vietnam, a darling of foreign investors over the past two years, has suddenly run in to a host of macroeconomic problems, including rising inflation, a widening trade deficit and slowing growth.

While it may be have taken a lead, Vietnam is hardly alone in its fading fundamentals in the region, and the trend spells the end to almost two years of Asian currencies appreciating against the greenback.

“That’s changed, and it’s changed rather quickly,” said James McCormack, head of Asia-Pacific Sovereign Ratings at Fitch Ratings in Hong Kong.

“All we need to do is look at how the trade flows and investment flows are going, and for Asia they are going to get worse,” he said.

“Based on these two trends we would expect Asian currencies to continue to weaken, or at least not return to their previous strengths.”

After two years of steadily appreciating Asian currencies against the dollar, ramped up by foreign money pouring in to the region because of its impressive growth, strong exports and stable macroeconomics, a shift towards depreciating currencies is a sign of the changing times.

“The Philippine peso is a good example of how things have changed in 2008,” said an economic assessment report of the DBS Bank of Singapore. “This year, growth is expected to slow while inflation has surged.”

“Although (the) US dollar and peso (exchange rate) has stopped rising of late, we are mindful that it could still head higher,” the report said. “History has shown that the US dollar and peso can return up to 44 percent of its past three years’ move.”

The depreciation of South-East Asia currencies has little to do with a strengthening dollar, but much more to do with the region’s ongoing dependence on the US economy, analysts said.

“We’re starting to see now virtually every Asian country’s export growth to the US is in decline, and in some countries may even be negative year-on-year,” McCormack said.

“There is no way that Asia can avoid a slowdown, because we’re really looking at a synchronized global slowdown,” he said.

“Decoupling from the US economy was the buzzword a while ago, but nobody seems to use that term anymore because everyone realizes its not going to happen.”

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