Exports will keep Asian currencies low in 1999

Exports will keep Asian currencies low in 1999

By P. Parameswaran

SINGAPORE (AFP): Asian currencies have risen strongly from record lows posted early this year but cannot make much headway in 1999 because the region's recession-hit economies want to keep exports cheap to fuel recovery, analysts say.

Other factors seen weighing on regional currencies next year are possible resumption of speculative attacks by hedge funds, worry of political chaos in Indonesia, as well as a looming Brazilian real devaluation.

"Asian economies will very much want to keep their currencies at undervalued territory to boost exports," said Thio Chin Loo, currency strategist at Banque Paribas in Singapore.

She said the priority of governments in 1999 would be to eject their economies out of recession using exports as the key to recovery.

"They will take the approach of lower interest rates, stimulatory fiscal policy and competitive currency," Thio said.

Asian exports have been lackluster despite steep currency devaluations since the regional financial crisis exploded in mid- 1997 with the de facto devaluation of the Thai baht.

Among economies expected to prevent their currencies from appreciating to retain export competitiveness are South Korea, Singapore, Malaysia, the Philippines, Thailand and Taiwan.

Societe Generale bank said in a research report released here that it expected South Korea's central bank to prevent the won from appreciating beyond 1,200 against the dollar. The won closed last week at 1,206.30.

The bank forecast the Taiwan dollar would weaken to 36.00 to the U.S. dollar by end-1999 from the current level of 32.24 due to lower interest rates and concerns over the impact of a weaker Chinese yuan outlook.

It also said there would be pressure for the Thai baht to climb to 32 against the dollar but the authorities would buy U.S. dollars and sell the Thai currency to maintain the current level of about 36.

A modest depreciation of the peso is also expected, to about 40-to-42 against the dollar from 38.95 at present.

Societe Generale said the Malaysian ringgit, fixed at 3.80 to the U.S. dollar as part of exchange controls imposed in September, was "clearly undervalued" and "an important boost to exports and deterrent to imports."

The Singapore office of British independent think-tank IDEA forecast the Singapore dollar to fall to 1.7200 against the greenback in the last quarter of 1999 as the city state suffered a loss of export market share and amid deflation worries.

The Singapore unit closed last week at 1.6590.

Fong Cheng Hong, Singapore-based regional analyst at Japanese financial house Nomura, was however upbeat on nearly all Asian currencies.

She predicted that by the end of 1999, the Singapore dollar would shoot up to 1.5500 against the U.S. dollar, the baht to 34.00, the peso to 35.00, the Taiwan dollar to 30.00 and the won to 1,150.

The Indonesian rupiah could however fall to 10,000 from last week's close of 7,860, Fong said.

She said "the worst case scenario" expected in 1999 was a devaluation of the Brazilian real that could wreak havoc on Wall Street and send markets in the region tumbling as well as political chaos in Indonesia where key polls had been scheduled for.

Analysts at IDEA said most of Asia's undervalued currencies would climb in the first six months of 1999 on the back of strong current account and capital account surpluses but warned of a rocky second half with the "reawakening of speculative activity" by hedge funds.

The funds, blamed for Asian currency crisis, had mostly unwound their long U.S. dollar positions in the third quarter of 1998 due to financial problems. This helped Asian currencies rise by default.

An IDEA survey suggests hedge funds could exploit the low interest rate environment in Asia from mid-1999 to take up short positions against regional currencies, led by the Hong Kong dollar.

"Pressure will mount on the Hong Kong dollar in the second half (of 1999)," warned Jacqueline Ong, IDEA's senior regional economist. "Renewed speculation that the Chinese yuan will devalue will also hit the Hong Kong unit."

Societe Generale said the yuan should remain stable but changes would be made to its trading band, which could arose concerns over the currency's longer-term direction and management.