ASEAN currencies seen weak in H1

ASEAN currencies seen weak in H1

Benjamin Pedley, Dow Jones, Singapore

Southeast Asian currencies could weaken in early 2003 on soft global demand, reversing the 2002 trend in which most of them gained ground amid general dollar weakness as the Federal Reserve guided U.S. interest rates to a 41-year low.

Though expansionary monetary and fiscal policy will spur U.S. economic growth, it might not be until the second half of 2003 that this filters through to southeast Asia in the form of increased demand for regional exports - a development that would then put a floor under the currencies of this region.

In the interim, and given few signs of economic turnaround in either the eurozone or Japan, dollar-denominated assets might again find favor among investors to the detriment of riskier currencies.

Added to that, the possibility of further easing by the Bank of Japan to reflate the economy and offset the deflationary effects of a planned cleanup of $400 billion in bad loans should push down the yen and drag southeast Asian units lower in tandem.

"Global growth will remain fragile, and Asia's external surplus economies (and currencies) are likely to be hurt by weak exports. But currency weakness toward the beginning of 2003 may abate in the latter half of the year in tandem with the yen," said UBS Warburg currency strategist Naomi Fink.

"We expect the direction of the yen to be the leading driver of Asian currencies," said Fink.

Regional currencies often track the direction of the yen to preserve price competitiveness on trade.

Indeed, a 6.1 percent rise in the yen in 2002 versus the dollar lifted most Southeast Asian units. The rupiah rose 16 percent, the Singapore dollar climbed 4.2 percent, and the baht gained 1.4 percent.

The exception was the peso, which slid 4 percent on concerns over a burgeoning budget deficit.

While the rupiah was the strongest performing unit in the region, analyst say geopolitical factors are conspiring again to create downside risks for the Indonesian currency.

Fink said "security risks" continue to hurt revenue from tourism, which is roughly equivalent to the national current account surplus. "With risk perceptions unlikely to abate soon, we remain bearish on the rupiah over the medium- and longer-term to its regional counterparts," she said. She forecasts the dollar will rise to Rp 9,500 in early 2003 from around Rp 8,985 currently.

Foreign investor sentiment toward Indonesia was damaged by Oct. 12 attacks on the resort island of Bali, which killed almost 200 mainly Western tourists, as the island had been a relative safe-haven amid sectarian violence in recent years elsewhere in the archipelago.

Tourism contributes around 4 percent to Indonesian gross domestic product, and employs eight million people nationwide with Bali the most popular Indonesian destination for foreign visitors.

And with the heightened prospect of military conflict between Iraq and Western interests led by the U.S. and U.K. come risks for the Indonesian currency and bond markets.

Just as events of 9/11 polarized Western and Islamic interests to the detriment of the rupiah and Jakarta's financial markets, so too would conflict with Iraq.

At the other end of the performance spectrum in 2002 was the Philippine peso, which tumbled on fiscal worries, which push up bond yields and thereby make it even more difficult for the government and private sector to repay debts.

The government expects the budget gap will narrow to 202 billion pesos in 2003 from an estimated 223 billion pesos in 2002. It originally pegged the 2002 deficit at 130 billion pesos.

Of all southeast Asian economies, Singapore is the most leveraged to the external sector with non-oil domestic exports equivalent to more than 70 percent of gross domestic product.

Hence, if the currencies of Singapore's major trading partners such as the euro and yen were to weaken - and many analysts anticipate losses in the latter - this would provide room for Singapore dollar losses against its U.S. counterpart.

The baht might be one of the better performers in the region in 2003.

In the second half of 2002, Thai economic growth picked up slightly as other economies slowed or, in the case of Singapore, contracted on a quarter-on-quarter basis.

And Thai equities matched that economic record.

The Bangkok market was the fifth best performed stock market in the world in 2002 in dollar terms, returning a 22 percent gain compared to, for example, a 25 percent fall in Philippine stocks.

Philip Wee, market strategist at Singapore's DBS Bank, said the sensitivity of the baht to foreign investor flows into the local stock market should help the baht to continue its outperformance of the Philippine unit.

The divergence of what many analysts said are the best and worst of Southeast Asian economies are reflected in recent assessments by credit ratings agencies.

Thailand received a positive outlook from Moody's Investors Service as Fitch Ratings joined Standard & Poor's in downgrading the Philippine debt outlook to negative on the government's "loss of control over fiscal finances," says Wee.