S.E. Asia faces currency volatility

S.E. Asia faces currency volatility

SINGAPORE (Reuter): Southeast Asian central banks, facing slower export growth, a welter of domestic issues and the specter of offshore speculation, may be forced to tighten their grip on their currencies, economists said.

"A combination of poor fundamentals, the stronger yen and slowdown in the flow of funds from Japan is creating renewed pressure in the local currency markets," a report from Deutsche Morgan Grenfell said this week.

It said the Thai baht and the Indonesian rupiah were among the currencies under most pressure as export growth slowed.

Economists said the baht seemed the most vulnerable and could be the target of investor and speculator sales if the Bank of Thailand (BOT) was seen lacking the resources to support it.

The baht was subject to a largescale withdrawal of funds two weeks ago. Foreign exchange dealers said the BOT had to spend more than US$1 billion to defend it.

A report from MMS International on Tuesday said capital outflow of 50 billion baht was expected if second-quarter earnings of listed firms in Thailand were poor.

Thai economist Somjai Phagaphasvivat of Thammasat University said the BOT may face further tests of its determination to defend the baht if Thailand's current account deficit showed no signs of narrowing in the next few months.

Relatively lackluster exports during the first half of this year have forced the BOT to raise its projection of the 1996 current account deficit to 7.8 percent of gross domestic product (GDP) from 6.5 percent.

The baht has been battered by talk of devaluation and widening of its trading band, but economists say the central bank isn't likely to move on any of these measures.

"The conservative institutions in Thailand will rally behind the baht. They will only be willing to give it up from a position of strength," said one.

In Indonesia, the potential of political disruptions rising from the government's dealings with ousted opposition leader Megawati Soekarnoputri, is keeping the rupiah's outlook fragile.

Economists say the rupiah, now favored for its high interest rate yield, is vulnerable to sharp capital outflows such as the one last month triggered by fears over President Soeharto's health.

The central bank also has to grapple with high domestic consumption growth, a slowdown in export growth and a strong inflow of arbitrage funds from offshore investors.

Bank Indonesia governor Soedradjad Djiwandono said last week short-term capital inflows were causing monetary problems but rejected short-term measures to deal with them.

"If the flows are considered to be transitory, then there is no reason to overreact," he said, adding policy options for the central bank included flexibility in exchange or interest rates.

Indonesia's currency regime, based on a basket of currencies with a depreciation rate of between four and five percent a year, has sufficed so far, economists said.

"A temporary cooling could remove some pressure from the central bank because money supplies had risen regularly above its target due to the inflows," a Jakarta economist said.

The Singapore dollar, often a safe haven, may come under pressure as GDP growth slows. The economy grew at 7.0 percent in the second quarter of this year against 10.9 percent in the first.

The Singapore dollar has been suffering outflows against the ringgit in recent weeks, forex dealers said. The Monetary Authority of Singapore, the de facto central bank, is monitoring the situation very closely, economists said.

In Malaysia, the ringgit is drawing inflows from the baht and the rupiah, but dealers said the central bank was likely to use monetary policy to deal with heavy flows.

Dealers said allowing interest rates to fall may be part of a central bank plan to slow the inflow of foreign funds taking advantage of Malaysia's interest rates.

In 1994, amidst heavy flows of hot money in and out of the country, Bank Negara lost several billion dollars and was forced to impose capital controls such as preventing foreigners from owning government paper and negative interest rates.