Asian currency war on the way

In a move viewed as part of ongoing currency wars in the region, Vietnam’s central bank allowed the dong to depreciate for the third time this year to stay competitive with China’s declining yuan.

Keeping currencies weak helps make a country’s products more affordable to foreign buyers, helping exporters and boosting economic growth – a concern for export-reliant markets like Vietnam.

In the Philippines, however, a senior central bank official said engaging neighbours by forcing the peso to lose value made little sense.

“Directly devaluing the currency or reducing interest rates to force the currency’s weakening does not make much sense because there could be unintended, unwarranted consequences,” said Diwa C Guinigundo, deputy governor of Bangko Sentral ng Pilipinas (BSP).

While a weaker currency can help exporters, it makes imported goods more expensive for the local population. The cost of servicing foreign debt also rises with a weaker currency.

BSP maintains a flexible policy for the Philippine peso, which is allowed to move up or down depending on market forces. Monetary authorities intervene in the market to smoothen out spikes in the peso’s value.

Guinigundo said exporters might lose part of their competitiveness against counterparts in other countries where currencies had weakened substantially.

The official said countries forcing their currencies to decline had economies that relied heavily on exports. The Philippine economy, for its part, stands on domestic pillars.

“From a macroeconomic standpoint, we have resilient domestic factors including consumption, private capital formation and public spending,” Guinigundo said.

“Competitiveness [for exporters] comes easy with devaluation but the more durable, more sustainable sources of external competitiveness go beyond that: lower cost of power, lower cost of doing business, better quality goods, quick turnaround time,” he said.

Meanwhile in Malaysia, despite the depreciating value of the ringgit, Kuala Lumpur will not impose capital controls or peg the currency to the US dollar, said Prime Minister Najib Razak.

Najib, who is also finance minister, said this was because Malaysian economic fundamentals remained sound and the currency devaluation was largely due to the “overwhelming strengthening” of the US dollar.

He said the decision was made after extensive discussions with the country’s central bank, economists, analysts and financial institutions.

“Although the Malaysian government [takes the view that] the current levels of the ringgit do not reflect its fundamentals, the government is cognisant of the integration of the Malaysian and global economies,” he told a news conference.

“We remain committed to market-friendly policies. As such, the government remains steadfast in maintaining the integrity and openness of its markets and will not impose capital controls, nor implement a peg for the ringgit to the US dollar.”

Asean nations are not yet looking at the possibility of having a common currency within the bloc but there is a need to do more for deeper economic integration, said Phanpob Plangprayoon, director of the economic division at the Thai Foreign Ministry’s Department of Asean Affairs.

At this point, there is nothing to suggest that Asean countries would seriously look into this issue, he said.

“However, we need to do more for deeper integration, and that is the underlying message.

“Asean needs to be competitive among themselves because they are competing with the world’s best.

“We have to constantly raise the bar among ourselves because we are already engaged with the outside world, who are very competitive.”

Phanpob added that the realisation of the Asean Economic Community at the end of this year was only an initial step towards deeper integration in the region.

He said the AEC was a necessity to allow Asean to compete with such countries as India and China.