The scenario for Southeast Asia’s currencies in 2016
HOW emerging currencies in Southeast Asia are going to do this year is one of the most asked questions among Asian dealers and traders.
Unfortunately, while we were trying hard to find a crystal-clear theme for the next 12 months, the Shanghai Composite Index unpredictably plunged by almost 10 per cent just a few days after the New Year’s party and the Brent crude-oil price dramatically dived to US$31 per barrel, a decade low.
Southeast Asia’s currencies have reacted to those events.
Malaysia’s ringgit depreciated by almost 3 per cent, while the strongest one, the Philippine peso, also declined by about 0.5 percent in the first week of this year alone.
What do we have to face further this year? In short, a commodity crash, monetary tightening in the United States and easing in China are going to run down Southeast Asian currencies’ spirit.
The US Federal Reserve is expected to increase interest rates, which would make the dollar more attractive. Southeast Asian currencies would weaken across the board. A modest depreciation of China’s yuan to support its weak economy is another critical point.
This does not mean China is pulling the trigger in a currency war. It does, however, indirectly indicate that China’s economy is worse than what people think. Therefore, highly China-related economies, such as Southeast Asia, are deteriorating.
Extra-critical issues are the crash in the oil price and high default risk.
If the oil price falls more, Malaysia and Indonesia will stay in the most dangerous situation. Revenue from crude oil is depleting but their foreign reserves and current accounts are running low. This would raise solvency questions, weaken their currencies and drag other Southeast Asian currencies down because of their strong relationship to one another.
External factors are indeed likely to hit all currencies in Southeast Asia this year.
Can we expect to see any of them be able to defend themselves? Or strike back?
Of course, not all countries need to follow China’s easing path against the US tightening. The Philippines and Thailand are in the best condition. Controllable inflation and less concern over economic growth will allow them to raise their interest rates by 0.50 and 0.25 percentage point respectively in 2016.
Some countries have immunity to China’s slowdown. As China shifts to an economy more driven by consumption and services, Singapore, Thailand and the Philippines are relative beneficiaries. Travel services in Thailand are as big as 7.7 per cent of gross domestic product.
Singapore’s financial-services exports are the largest in the region at 5.3 per cent of GDP and the Philippines is a large exporter of technical, trade-related services at 3.8 per cent of GDP.
Now for money managers.
I think Singapore’s equity market and Indonesia’s bond market have enough rewards to compensate for the risks.
Singapore’s is the cheapest stock market in our region with its price-to-earnings ratio of only 16 times and a dividend yield of around 4 per cent.
Regarding bonds, although the default risk clouds Indonesia’s rupiah, its bonds compensate almost 8 per cent back to holders.
Some are good. Some are bad. At last, 2016 is here.
Fresh turmoil in China’s stock markets and the downtrend in the yuan indeed downgrade our confidence towards emerging markets. If we measure every factor altogether and look for the likeliest scenarios for 2016, I expect all currencies to depreciate slightly against the US dollar.
My ranking, from the best to the worst performance, is the Thai baht, Singapore dollar, Philippine peso, Indonesian rupiah and Malaysian ringgit.
Nevertheless, we should remember for the rest of the year that “opportunities are often hidden in risks”. As ever, it will pay to take a view in 2016.
Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. Jitipol Puksamatanan is a global economist and currency strategist at TMB Bank. He can be reached at [email protected].
