Firmer Asian currencies likely: Analysts

Firmer Asian currencies likely: Analysts

SINGAPORE (Reuters): Asian regional currencies have lost as much as 80 percent of their value since the crisis first hit last July but later this year the picture should look much rosier, financial analysts said.

The fixed or semi-fixed currency regimes that were prevalent across Asia at the beginning of last year were basically blown apart by widening current account gaps.

As the amount of cash to pay for imports accelerated away from that coming in from export earnings, the currencies labored under an increasingly heavy burden -- and eventually it was too much for them and they fell.

But the crisis has flattened the Asian Tigers economically and domestic demand is already contracting sharply. This means fewer imports and a sharp improvement in the current account position.

"On the one hand weaker domestic currencies allied to slumping levels of domestic demand are going to lead to a sharp fall off in imports, while cheaper currencies are going to lead to higher exports," said Desmond Supple, head of Asian currencies research at BZW in Singapore.

"This year Asia is actually going to be a capital-exporting region as defined by a large current account surplus."

Thailand has already announced bigger-than-expected trade and current account surpluses for September and October, the first clear sign that the baht's plunge is helping the country's balance of payments.

Credit Lyonnais Securities in Singapore forecasts these current account balances for the region this year, and bullishly for the currencies, they are all surpluses: Indonesia $2.5 billion, South Korea $6 billion, Malaysia $1.1 billion, Philippines $600 million, Singapore $11.9 billion and Thailand $10.6 billion.

The effect of all this will certainly take a while and at present Asia is still in the adjustment process and only in January did negotiations get underway to solve the problem of Indonesia's massive debt mountain.

The Asia crisis has moved into its second phase. The market turmoil is over, now the period of economic adjustment can begin.

As economies slow down unemployment will raise its ugly head and with it will come the possibility of social unrest.

Forthcoming elections in Indonesia and the Philippines will also keep Asian currencies jittery, so before the improvement in the current account position can have an impact there is likely to be continued pressure on the regional currencies.

"We are not out of it yet," said Tim Fox, chief treasury economist at Standard Chartered in London. "Currencies are perhaps a little more stable due to the fact we have come a long way very fast... (But) we are still waiting for issues, including political issues, to be resolved so we are not at the end of this."

So until the short- to medium-term issues are resolved trading is likely to remain volatile and currencies soft.

"I think you are looking at the second half of the year... Currencies won't show any meaningful bounce until you get beyond medium- and short-term social and economic concerns," Standard's Fox added.

So there will be an improvement and analysts are agreed that by almost any measure Asian regional currencies are oversold a current levels.

But until overseas investors can be tempted back in or cash begins to flow into the region from increased exports the current state of affairs is unlikely to change very much.