Dollar demand, the bane of Asian central banks
Dollar demand, the bane of Asian central banks
SINGAPORE (Reuters): Asian central bankers are scrounging to meet corporate demand for U.S. dollars and the pressure is unlikely to abate in the near-term, financial analysts said yesterday.
Central banks are desperately trying to stop their local currencies from falling but their task is no longer fighting speculators, the battle now is simply providing the dollars that their corporate sector needs.
"No one is fully hedged, nobody can be fully hedged, it's almost impossible. So the net demand for dollars is a pure reflection of where the spot exchange rate goes," said Chris Tinker, Regional Head of Economics & Debt Research at ING-Barings in Hong Kong.
"You always get natural dollar demand this time of year but things are different this time."
The problem stems from before the regional crisis, when currencies around the region were fixed or semi-fixed and therefore there was no need for firms to insure against foreign exchange risk.
Companies that deal offshore usually protect themselves against moves in their local currency by buying or selling dollars forward in some way; this is known as hedging.
For instance any firm that imports materials may sign a contract whereby they will hand over dollars to an overseas supplier in, say, six months time when the goods arrive.
The investment is then insured against future currency weakness. Exporters, on the other hand, must insure against a strengthening of the local currency.
The only exporters who have done well during the currency crises are those who do not have to import a great deal and rely on local materials.
For instance, tin, palm oil and rubber goods producers in Malaysia will have done extremely well out of a 34 percent drop in the value of the ringgit because their raw materials are produced domestically.
They are now getting 3.8 ringgit for every dollar they receive from overseas customers compared with just 2.5 before the crisis.
So it is possible to make money by not hedging, although by doing so a firm knows exactly where it is going to stand in terms of the local currency and can plan future corporate strategy and financing accordingly.
But if their local currency never moved, or moved very little, there would be no point spending good money and paying banks for hedging instruments.
As one analyst said, "If your house is made of asbestos, you don't waste money insuring it against fire."
This was the situation across most of Asia before the crisis struck this year, currencies were pegged.
But all that changed dramatically in July when Thailand kicked off a game that ended up with fixed or semi-fixed exchange rate schemes being abandoned in Tiger economies around the region, and currencies fell sharply.
Previously unhedged companies found themselves with lots of catching up to do in terms of buying dollars not only to hedge but also to pay off loans.
The overseas debt problem is also a major one for central banks. Many Asian corporates have been living beyond their means on short-term dollar loans for some time and the outstanding amount is huge.
Banks are calling in their loans, or refusing to roll them over, igniting an unseemly corporate quest for dollars.
Every time a local currency falls, the cost of a corporate's overseas dollar denominated debt increases. While the debt dollar value stays the same it costs the corporate more to buy the dollars.
So a vicious circle develops where a corporate buys dollars to cover debt so the value of the local currency falls. The further it falls the more urgent becomes the need to buy dollars for the future.
"It's a real dilemma for the central banks given their reserves have run out, and the fact that corporates are not providing any dollar liquidity to the market at the moment," said one Singapore based analyst.
"The only source of dollars at the moment is official sources, corporates are not providing any liquidity whatsoever, if they're not actively buying dollars they are keeping what they have offshore."