Focusing on SE Asia's foreign exchange wooers

Focusing on SE Asia's foreign exchange wooers

By Sonali Desai

SINGAPORE (Reuters): The gloom shrouding Southeast Asia's
currencies in the wake of the rupiah's steep drop has spurred
talk in the markets of a contagion effect, but analysts are quick
to dismiss the notion.

This is not 1997, there is no balance of payments crisis and
investors are not embarking on a "sell-Asia" spree.

The rupiah's descent to 16-month lows last week amid mounting
worries about Indonesia's political and security situation did
spur some weakness in the Philippine peso, Thai baht and even the
stalwart Singapore dollar.

But analysts note these declines are very much more tied to
domestic ills or, in the case of Singapore, its trade-weighted
currency basket.

"Simply viewing the recent weakness in Asian currencies as
contagion is missing the fact that the recent trends in the baht
and peso were merely continuations of primary trends of
weakness," said Desmond Supple, economist at Barclays Capital.

"While sentiment in Asia inevitably suffers from political
instability in Indonesia, the actual impact on the regional
business cycle is minimal," he said.

With healthy current account surpluses, floating exchange
rates and debt restructuring efforts, there is little risk of the
herd-like sell-off that characterized the Asian crisis, resulting
in forced devaluations and near economic collapse.

Analysts said governments had clearly learned the lesson of
1997 and were opting to let currencies take the strain, avoiding
expensive intervention or economically-damaging rate hikes.

"The main point here is event risk has fallen in the region
because all these economies have moved from fixed to floating
exchange rates," said Vincent Low, strategist at Merrill Lynch.

"So moving from 37 to 40 (baht to the dollar) is very far
removed from the days of the crisis when the Bank of Thailand's
hand was forced and it had to go from 25 to 56 in a few months."

Low noted that Asia's macroeconomic profile was also much
improved from before the crisis.

"We're talking about current account surpluses, companies that
are less leveraged, short-term forex exposure has declined, easy
monetary conditions".

Analysts said investors were, if anything, tending to
differentiate more among individual economies in Asia, as
evidenced by continuing portfolio inflows to Hong Kong, South
Korea and Taiwan.

Even the Singapore dollar's fall to 16-month lows this week
has more to do with the authorities condoning a mild depreciation
as the currencies of its neighbors and export rivals slide.

In any case, the Sing dollar's 4.4 percent drop against the
U.S. dollar since the start of the year is far removed from the
peso's 10 percent loss and the rupiah's 27 percent slump.

None of this detracts from the fact that Indonesia and the
Philippines do face a very real threat unless they are somehow
able to restore political and economic stability.

Both countries have been hard hit by doubts about their
leadership, which have increasingly undermined their markets and
economies, giving investor confidence a further jolt.

Thailand has also suffered a bit as opposition efforts to push
for an early election spark worries about a delay to the national
budget, but analysts say the risks are more contained.

The Philippine central bank, like the Bank of Thailand, has
opted for a hands-off approach, which analysts see as appropriate
given still subdued inflation and efforts to manage foreign debt.

Bank Indonesia has also ruled out forex intervention, but it
has repeatedly hiked rates since May, pushing one-month central
bank certificates to 13.1 percent from 10.9 percent on May 10.

Unfortunately, that hasn't really helped the rupiah.

"Once everybody starts selling the currency, the loss in
confidence is much more overwhelming than anything that interest
rates could do," said Mangal Goswami, regional economist at ABN-
Amro Bank.

"Something has got to be resolved on the political front."

For Bank Indonesia, whose chief is himself embroiled in a
political scandal, the options are less clear cut.

A sustained rupiah depreciation would inflate food prices,
potentially sparking the kind of social unrest that led to former
president Soeharto being ousted in 1998.

At the same time, higher rates would magnify the cost of
recapitalizing the banking sector, already estimated at over 40
percent of gross domestic product.

"Higher interest rates are clearly an imperfect and incomplete
solution to Indonesia's woes," said Steve Brice, treasury
economist at Standard Chartered, in a research note.

"But those looking for perfect solutions will likely be
disappointed."