Economic woes for Malaysia and Thailand as their currencies weaken against the US dollar, soaring import costs and inflation threats

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Southeast Asian currencies are currently hovering near their lowest points for the year in the face of a robust U.S. dollar, with the Malaysian ringgit and Thai baht at the forefront of this decline. This has raised concerns among governments and businesses in the region, as they grapple with the potential economic consequences of this depreciation.

The devaluation of these currencies is causing an increase in import expenses, putting pressure on regional exporters. Unfortunately, the export sector is finding it challenging to capitalize on the situation due to ongoing uncertainties in major markets, particularly China.

While a weaker currency typically benefits exporters and the tourism industry, a prolonged drop carries the risk of triggering capital outflows. Additionally, the recent upswing in oil prices has added to worries about accelerated inflation.

In the words of Charu Chanana, a market strategist at Saxo Markets in Singapore, “A combination of a stronger U.S. dollar, a less robust Chinese economy, and higher oil prices has evolved into a precarious mix for most of the ASEAN economies,” as reported by Nikkei Asia.

As of October 13, the ringgit and baht are the poorest performers in Southeast Asia against the U.S. dollar this year, with respective declines of 6.9% and 4.4%. The Vietnamese dong has also slipped by 3.4%, while Indonesia’s rupiah and Singapore’s dollar have exhibited more resilience against the greenback, with decreases of 2.1% and 0.7%, respectively.

This broad depreciation can be attributed to the strength of the U.S. economy, accompanied by robust wage growth, which has pushed up Treasury yields and the value of the dollar. The resilience of the U.S. economy has led some investors to anticipate that the Federal Reserve will maintain higher interest rates for an extended period to combat inflation.

These elevated interest rates in the United States are attracting investors seeking more attractive returns, thus encouraging capital outflows from Southeast Asia and contributing to the weakening of regional currencies. For example, the Malaysian ringgit reached a 10-month low against the dollar on October 4.

Malaysia’s currency is facing pressure due to a widening interest rate gap with the United States. Malaysia’s central bank has raised its benchmark rate only once this year, reaching 3% in May, while the Federal Reserve has increased U.S. rates to between 5.25% and 5.5%. The Malaysian ringgit is also influenced by the country’s exposure to the slower-growing Chinese economy, as it tends to move in tandem with the Chinese yuan. Decreased prices for key exports like palm oil and natural gas further contribute to its depreciation.

Malaysia’s government is exploring the use of local currencies for trade to reduce reliance on the U.S. dollar, a move already initiated with Indonesia, Thailand, and China. Similar concerns about a strengthening U.S. dollar are echoed in neighboring countries like Thailand, where the baht has hit a 10-month low, affecting exporters who fear exchange rate losses due to the baht’s volatility. The Joint Standing Committee on Commerce, Industries, and Banking in Thailand suggests stabilizing the currency to support exports.

In Indonesia, while a weaker currency traditionally benefits certain export-oriented industries, a declining trade surplus and lower commodity prices have weakened the support for the rupiah. In contrast, the Philippines maintains a hawkish stance on the peso’s depreciation to boost the value of remittances from overseas workers, as preferred by the central bank governor.

Simultaneously, a weaker currency results in significantly higher costs for importers, particularly for energy and other inputs crucial for manufacturing products meant for export. Vietnam, in particular, is heavily impacted due to its high rate of imports and exports as a percentage of its GDP, following Singapore in the region. This is particularly challenging as it coincides with a critical period for imports, which have been steadily increasing since the summer in preparation for the holiday season.

Despite these challenges, the Vietnamese central bank took the unique step of being the first in Asia to reduce interest rates this year, beginning in March with the aim of alleviating economic difficulties. This move is intended to stimulate lending and business activities in the face of subdued global demand for Vietnamese exports, a real estate crisis, and significant layoffs.

However, there are concerns that such measures, while designed to aid the property sector, could potentially have ripple effects on energy imports, particularly affecting coal prices. Nick Ferres, Chief Investment Officer at Vantage Point Asset Management, notes that the energy sector in Vietnam may feel the impact of high exchange rates, which could lead to increased costs for consumers.

At present, Richard Bullock, a senior research analyst at Newton Investment Management, believes that the currency depreciations are manageable for the region. The balance of payments remains generally healthy, and foreign exchange reserves are sufficiently substantial to cushion short-term capital outflows.

Nevertheless, the rise in oil prices could pose a challenge to regional economies, which have experienced lower inflation compared to the U.S. and Europe. Brent crude oil traded above $90 a barrel in September for the first time since November 2022, driven by supply reductions from Saudi Arabia and Russia. Morgan Stanley’s research suggests that oil prices may exceed $90 a barrel through mid-2024, and they caution that this could have a notable impact on the region’s inflation.

Furthermore, the market may be underestimating the risk of Asian central banks adopting a more hawkish stance should inflation surprise the market by exceeding expectations in 2024, as noted by Morgan Stanley.

(Source: Tsubasa Suruga | Norman Goh | Apornrath Phoonphongphiphat | Lien Hoang | Ramon Royandoyan | Erwida Maulia | Echo Wong | Nikkei Asia)

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