Asia Has Crisis to Thank for Gains in Emerging Rout: CurrenciesYumi Teso and Lilian Karunungan
A decade and a half of good housekeeping is spurring Asian currencies from Indonesia’s rupiah to Thailand’s baht as investors increasingly differentiate between emerging-market assets.
Of more than 20 developing-nation exchange rates tracked by Bloomberg, the rupiah, baht and Singapore dollar were the only ones to have gained this year through yesterday, while options prices show Asian currencies are best placed to ride out further losses. Investors are most pessimistic about Argentina’s peso, which was devalued last month, and Turkey’s lira, after the country’s rating outlook was cut by Standard & Poor’s less than two weeks ago.
Helped by fast-growing economies, Asia’s developing nations have built up foreign reserves and trade surpluses after being forced to seek International Monetary Fund loans following the region’s financial crisis of the late 1990s. Emerging-market currencies suffered their biggest exodus since 2008 over the past year, as the Federal Reserve reduced its unprecedented monetary stimulus and China’s manufacturing industry slowed.
“High levels of foreign-exchange reserves and mostly healthy external positions will help to provide a degree of resilience to Asian currencies,” Mitul Kotecha, the global head of foreign-exchange strategy at Credit Agricole SA in Hong Kong, said yesterday. “Nonetheless, Fed tapering and subsequent capital outflows will limit any appreciation.”
Credit Agricole sees South Korea’s won, which has gained 2.2 percent since Feb. 4 to 1,056.73 per dollar, rising by mid-year to 1,040. The Philippine peso will climb 3 percent to 43.3 to the greenback, it predicts.
Indonesia’s rupiah rose 2.7 percent this year, touching a three-month high of 11,658 per dollar yesterday, while the baht gained 0.7 percent to 32.471. Singapore’s dollar is up 0.2 percent to S$1.2604 to the greenback, and reached the strongest level yesterday since Dec. 18.
South Korea, Malaysia, Taiwan, Indonesia, Thailand and the Philippines had combined foreign-exchange reserves of $1.2 trillion last month, more than five times the $233 billion figure at the end of 1998, official data show. China’s foreign-currency holdings reached a record $3.8 trillion in December, the world’s largest, from $145 billion 15 years earlier.
“Economies with better reserves and current-account positions are stronger because investors will become more selective as the Fed tapers,” Tsutomu Soma, manager of the fixed-income business unit at Rakuten Securities Inc. in Tokyo, said in a Feb. 13 phone interview. “That puts Asia in a better position to lead the emerging-market recovery, and the options market reflects that.”
While options traders expect all but one of 23 developing currencies tracked by Bloomberg to weaken this year as investors plow money into havens, the five least-bearish wagers are all on Asian currencies.
The premium that traders pay for one-year options giving the right to sell China’s yuan over contracts allowing purchases is 0.92 percentage point, the smallest in the group and down from a four-month high of 1.28 on Feb. 5.
Taiwan’s dollar had the next-smallest premium at 1.49 percentage points, down from 1.79 on Jan. 17. Traders pay as much as 10 percentage points more to sell Argentina’s peso than to buy it, while the extra cost for the lira is 6.06, up from 4.32 in October, data compiled by Bloomberg show.
Hong Kong’s dollar, which is pegged to the U.S. currency, is the only one of the 23 currencies that traders are betting will strengthen.
The Asian crisis of 1997-98 started with a real-estate meltdown in Thailand, before spreading across the region. Nations including South Korea spent billions of dollars trying to fend off speculators who were selling their currencies, before being forced to devalue their exchange rates. They ended up seeking bailouts from the IMF that required governments to adhere to economic targets.
The countries have spent the past 15 years making sure this can never happen again. Healthier current-account balances from the Philippines to South Korea make them less vulnerable to U.S. stimulus cuts, while improving foreign reserves in China and Taiwan contrast with declines in those of Argentina and Turkey.
The changes since the crisis have made Asian countries better able to weather a crisis, Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein said in a Feb. 11 Bloomberg Television interview.
“Asia is not facing significant depreciation of their currencies,” Craig Chan, the head of Asia ex-Japan currency strategy at Nomura Holdings Inc. in Singapore, said in an interview yesterday. “There have been significant improvements.”
Developing nations elsewhere in the world don’t have the advantage of having spent years building up their defenses against attacks by speculators.
Turkey and Argentina have the lowest percentage of reserves to gross domestic product at 4 percent and 6 percent, signaling their inability to withstand capital flight, according to a Goldman Sachs report on Jan. 29.
Argentina spent $25 billion of its foreign reserves defending the peso since March 2011, and still had to devalue last month, while Turkey only reversed the lira’s slide by unexpectedly raising its main interest rates to put off speculators. S&P cited Turkey’s widening current-account deficit and falling reserves when it lowered the outlook on its BB+ credit rating to “negative” from “stable” on Feb. 7.
“We find overvaluations in Latin America and Europe, Middle East and African currencies more than in Asia based on current accounts,” Bhanu Baweja, UBS AG’s head of emerging-market cross-asset strategy in London, said in an interview yesterday. “We are most negative on EMEA currencies than any others,” particularly Hungary’s forint, Turkey’s lira and South Africa’s rand, he said.
Asia’s developing economies will grow 6.7 percent in 2014, compared with 2.8 percent in central and eastern Europe and 3 percent for Latin America and the Caribbean, the IMF forecasts.
DBS Group Holdings Ltd., Southeast Asia’s largest lender, predicts most of the region’s currencies will appreciate, led by gains of 7.1 percent in the won to 995 per dollar by year-end and 4.9 percent in Malaysia’s ringgit to 3.15.
“We expect to see significant inflows into Asia over the next several years based on Asia’s growth differentials with the rest of the world,” David Carbon, an economist at DBS in Singapore, said in a Feb. 12 e-mail. “The rout in emerging markets is a misnomer. Latin America and emerging Europe are being hit but Asia, for the most part, is not.”