December 11, 2000 Heard in Asia: Asia Central Banks' Rate Cuts Could Hurt Weak Currencies
By JASON BOOTH
Staff Reporter of THE WALL STREET JOURNAL
The U.S. dollar may finally be weakening. But that doesn't mean Asia's beleaguered currencies will gain strength any time soon, economists say.
While some of the region's currencies have rallied against the U.S. dollar in the last week, the prevailing view is that Asian exchange rates will soon be headed even lower, beset by economic fatigue and political instability.
Just as the U.S. been hinting at an interest-rate cut -- in fact partly because of it -- Asian central banks look set to initiate a round of rate reductions that will further weaken their currencies. "Asia is entering an era of economic weakness," says Desmond Supple head of regional foreign-exchange research at Barclays Capital "In the near term, the outlook for Asian currencies looks bad."
The Risks
That could be disappointing news for equity investors hoping foreign-exchange gains might add an upside kick to the value of their depressed Asian portfolios. Although nearly all of the region's current-account balances are in the black, the situation could weaken the positions of Asian nations as feeble currencies will increase the size of their foreign-currency debt and push up the cost of oil imports.
Despite the risks, the bottom line remains the same -- Asian countries desperately need to rein in their currencies in order to withstand an increasingly harsh economic environment.
Rate Expectation
Asian currency forecasts for March 2001 (versus US$)
Current Forecast
Thai Baht 43 46
Taiwan dollar 33 35
Singapore dollar 1.74 1.74
Philippines peso 50 51
Malaysia ringgit 3.8 3.8
Korea won 1189 1200
Indonesia rupiah 9555 9600
India rupee 46.7 47.5
Hong Kong dollar 7.8 7.8
China renminbi 8.28 8.27
Source: HSBC, Reuters
Export growth, which underpinned Asia's recovery from the economic crisis of 1997, is flagging. According to Goldman Sachs's estimates, Asian exports will grow at 10.5% year on year in 2001, slowing from 17.5% this year. That will help lower gross domestic product growth estimates for the region to 6% in 2001, down from 6.6% this year. J.P. Morgan forecasts that regional growth, excluding India and China, will slow to below 2.5% in the fourth quarter of the year.
To counter this slowdown, Asian central banks are expected to lower interest rates or at least put existing rate-tightening policies on hold.
In the last week, the Philippines has cut overnight interest rates twice, by a total of one percentage point. And economists are predicting that Taiwan, South Korea and Malaysia should each cut rates in the next few months.
Lower interest rates weaken a nation's currency because funds will typically shift to other countries where higher yields are available. While the negative side effect of a weak currency is the likelihood of increased inflationary pressure, the benefit is that it will boost the price competitiveness of a nation's exports. And given Asia's dependence on exports for much of its economic growth, that is a competitive advantage that most of the region's central bankers cannot afford to pass up.
"The terms of trade have turned against Asia," says William Belchere, chief economist for Merrill Lynch in Singapore. "A weaker exchange rate could be a key tool to lessen the fall in regional growth rates."
Meanwhile, a reduction in domestic interest rates also has the positive effect of stimulating domestic consumption, as people will be more likely to borrow and spend money. Such a pickup in the domestic economy will be vital to Asian nations struggling with a slowdown in export earnings, economists say.
Yet economic concerns are not the only factors depressing currencies in Asia. In a recent report, HSBC economist Geoffrey Barker pointed to political instability as a reason to sell the currencies of Thailand, the Philippines, Indonesia and Taiwan. The leaders of both Taiwan and the Philippines face serious challenges to their presidencies. Thailand is gearing up for a contentious national election in January, while Indonesia remains wracked by ethnic unrest.
China Stands Strong
Ironically, other than the greenback-linked Hong Kong dollar, the one currency that still stands out as one of the strongest in Asia is the Chinese renminbi (the official name for the trading band of the yuan). For years, analysts and investors have speculated on when the Chinese government would devalue the currency in order to help revive the moribund economy. Yet now, the talk of devaluation is over, indeed, the renminbi looks like one of the strongest currencies in the region.
That's because China has what the rest of Asia does not: accelerating economic growth, a rising level of investment and rising interest rates. As a result, the renminbi is the only Asian currency that Mr. Barker at HSBC currently has a "buy" recommendation on.
As for the rest of the region's currencies, economists say we will have to wait until at least the end of the first quarter of 2001 for signs of recovery. At that time, some of the political uncertainties in the region may have eased and a clearer picture of U.S. economic growth will have emerged.
Write to Jason Booth at jason.booth@awsj.com1
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