Dwindling Reserves Force Southeast Asia to Escalate Currency War

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Southeast Asia’s dwindling foreign-exchange holdings are exacerbating the risk of a currency war as policy makers have little choice but to allow exchange rates to weaken.

Malaysian reserves have fallen 19 percent this year to $94.5 billion, reducing the central bank’s ability to stem a 17 percent drop in the ringgit. Indonesia’s stockpile, which shrunk 6.9 percent in the five months through July, may come under greater pressure after Bank Indonesia said Friday that it would seek to prevent the rupiah, which is down 12 percent in 2015, from “overshooting.”

Regional currencies are retreating across the board as sliding prices for Southeast Asia’s commodity exports coincide with a yuan devaluation and the prospect of higher U.S. interest rates. Vietnam responded to the slump in China’s currency with a devaluation of its own. Credit Suisse Group AG says Thailand is favoring depreciation to revive an economy expanding at the slowest pace in the region after Singapore.

“We are deeper and deeper into a more and more worrying currency war,” said Michael Every, the head of financial markets research at Rabobank Group in Hong Kong. “In some cases, it’s a deliberate policy. In others, it’s not that they’re looking for a currency war, they’re just looking to domestic fundamentals.”

The ringgit led a drop in Southeast Asian currencies on Monday, falling 1.1 percent as of 12:27 p.m. in Kuala Lumpur, according to data compiled by Bloomberg. The Philippine peso and the Indonesian rupiah lost 0.7 percent and Thailand’s baht was down 0.2 percent.

Still Adequate

Malaysia’s reserves are enough to finance 7.5 months of retained imports, the central bank said in a statement Friday. Indonesia’s reserves of $107.55 billion at end-July are sufficient to cover seven months of imports, according to figures from Bank Indonesia.

The drop in Malaysian reserves was anticipated and the central bank will set about rebuilding them, Bank Negara Governor Zeti Akhtar Aziz said Aug. 13.

“We have high levels of reserves and that is what reserves are for, to represent buffers during this period,” she said Thursday. “We have held more than the amount of reserves our country needs, precisely for reversals.”

Bank Indonesia Director Nanang Hendarsah said Aug. 5 that foreign-reserves ammunition needed to be conserved to manage the currency. The stockpile is still adequate and there’s a need to prevent the rupiah overshooting more, he said on Friday.

“I don’t see any signs that Bank Indonesia is trying to hold the rupiah at a certain level,” said Leo Rinaldy, a Jakarta-based economist at PT Mandiri Sekuritas, a unit of the country’s largest lender by assets. It’s more focused on smoothing volatility, he said.

Unintended Consequences

Other Southeast Asian currencies have dropped less than the ringgit and rupiah in 2015. The baht is down 8 percent, Vietnam’s dong declined 5 percent and the Philippine peso has slipped 4.4 percent.

Using the exchange rate as a tool to boost trade could lead to unintended consequences such as triggering competitive devaluations across the region, Philippine Finance Secretary Cesar Purisima said on Sunday.

“Gains from devaluation would eventually be weighed against costs as investors may view the weakening yuan as a one-way bet and stoke fears of capital flight,” he said.

Thailand’s foreign-exchange reserves fell 1 percent this year to $155.3 billion as of Aug. 14, according to central bank figures released Friday.

‘Already Cracked’

“In terms of the amount of reserves against the amount of short-term external debt, Thailand remains healthier than countries like Malaysia and Indonesia,” said Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo. “The Bank of Thailand may allow a weaker baht while the baht catches up with declines in other currencies.”

Vietnam doubled the dong’s trading limit to 2 percent on Aug. 12, a day after China slashed the yuan’s fixing. Authorities in Hanoi devalued their currency by 1 percent last week and expanded the band again, to 3 percent.

“Vietnam has already cracked,” said Tim Condon, the head of Asian research at ING Groep NV in Singapore. It didn’t have enough reserves to support the dong and we could see more devaluations this year, he said.

Indonesian exports have fallen in each of the last 10 months and dropped 19 percent in July from a year earlier, the most since August 2012. Thai shipments declined every month this year through June, while Malaysian overseas sales fell in four of the first six months.

Less Ammunition

That’s flowed through to slower growth in the three economies. Thailand expanded 2.8 percent last quarter and Malaysia’s gross domestic product increased 4.9 percent, the least in almost two years. Indonesia grew 4.67 percent in the worst quarterly performance since 2009.

Malaysia and Indonesia are facing the problem that with less reserves ammunition they have to be more prudent in how they defend their currencies, said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse.

Thailand “is more deliberately just wanting to cheapen the currency in order to support growth,” he said. “The common problem they face right now is growth and the need to rely a lot more on the currency.”

For more, read this QuickTake: Currency Wars

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