Currency woes feared to turn into Asia-wide devaluations

Currency woes feared to turn into Asia-wide devaluations

SINGAPORE (Reuters): Asia's currency crisis started life as an isolated speculative attack on the Thai baht, but now seems to have degenerated into an Asia-wide cycle of leap-frogging devaluations, with even the Hong Kong dollar now seen under threat.

"There is an argument to be made that if you have a 40 percent decline in the baht then it makes sense that other regional currencies do have to be weaker," said Chiang Yao Chye, Head of Asia Pacific Research at CIBC in Singapore.

"The problem is obviously when things overshoot like they are now and currencies tumble over each other downwards. Then that argument becomes irrational."

Taiwan last week became the latest to cast it currency adrift on the stormy seas of the forex market, and since it has dropped five percent from the T$28.5 level the central bank had been defending since early August with aggressive intervention.

This even had a knock-on impact on the mighty Hong Kong dollar and the market is currently alive with talk that its peg to the U.S. dollar is under threat.

This is because it is basically the last pegged currency in Asia although analysts say economic fundamentals and huge forex reserves probably mean the peg is safe for now.

Indeed the Hong Kong dollar strengthened initially yesterday before edging back from an intraday high at 7.615 in the afternoon. It was quoted at 7.705 at 0850 GMT.

Overnight money market rates shot up to 250-280 percent yesterday from six percent on Wednesday. The Hong Kong Monetary Authority was seen mopping up liquidity in the money market to defend the currency peg, dealers said.

Hong Kong chief executive Tung Chee-hwa stressed yesterday his government's commitment to hold the dollar peg.

"There is tremendous determination on the part of the Hong Kong government to maintain the exchange rate. We have every confidence this can be done", he told journalists in London.

But would Hong Kong benefit from a lower currency and who will fair best of the other Asian nations from the existing devaluations?

On the plus side, exports are set to rise because of the increased competitiveness due to the lower currencies, but there is the danger of inflation down the line as imports become more expensive.

The rise in import prices also hits exporters depending on the import content of the goods they sell abroad. This obviously differs from country to country.

Analysts said by and large, the Southeast Asian export sectors do respond to exchange rate weakening except for the Philippines where the agriculture based export market has little or no room to increase production.

Thai exports respond positively to a lower exchange rate but the effect is rather short-lived and there is a long lag in Malaysian exports' response to the ringgit's weakness, they added.

In Hong Kong, a lower currency would have little impact and the economy would not benefit much because it does not depend heavily on exported goods.

"Hong Kong wouldn't benefit much from any kind of devaluation because manufacturing is not a big part of the economy, it's the service side that is a lot more important," CIBC's Chiang said.

Singapore and Indonesia are the two which will do the best. Singapore because its more developed economy and well managed will allow it to roll with any economic punches.

Indonesia also has been, and is, more realistic when it comes to economic reality and it does not have a lot of imports compared with the rest of Asia. On top of this its traditional exports, like textiles, will continue to do well, analysts said.

Historically, Asia has weathered currency storms well and following the last large deprecations in the mid-1980s, Thailand went on to register 9.5 percent growth over the following 10- years.

Malaysia grew 8.4 percent and Indonesia 6.9 percent and even the Philippines, which has had 10-years of serious economic and political problems, managed growth of 5.2 percent from 1995 to 1996.

"So long as currency regime shifts are not permitted to endanger other underlying past commitments, especially the maintenance of low inflation and of an open and free capital market, it is likely that the environment that created the Asian miracle can continue to do so," said John Tatom, Senior International Economist at UBS in Zurich.