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."