The weak US dollar, accelerating inflation and the prospect of higher interest rates have pushed Southeast Asian currencies to their highest levels in years, with some hitting levels not seen since the Asian Financial Crisis wrought economic destruction across the region 13 years ago.
Things in most Southeast Asian economies are looking good compared with the fiscal outlook facing the United States, Europe and Japan. Soft US jobs data, a relapse in Greece and the aftermath of Japan’s catastrophic earthquake are just the latest signals of severe international economic malaise there.
With a little help from China’s strengthening yuan, which makes goods out of Southeast Asia cheaper for Chinese buyers, regional currencies are expected to continue gaining over the next 12 months.
As always, currency fluctuations produce mixed results in a well-rounded economy. In Southeast Asia, prices on foreign goods should fall as purchasing power rises in tandem with the local unit, while the cost of locally made products can rise with inflation feeding into the system.
This isn't helped by big foreign income earners, particularly in the resources sector where contracts are usually written with US dollars as the trading currency, resulting in lower returns to the bottom line for companies, shareholders and the government in taxes and royalties.
However, for the same reasons Southeast Asia is being spared the full impact from rising oil prices, which are back above $100 a barrel. Analysts have calculated that the conflict in the Middle East, particularly in Libya, has added a $30 risk premium to each barrel of oil. Libya has virtually shut down all oil production.
Malaysia’s International Trade and Industry Minister Mustapa Mohamed said the weaker dollar shouldn’t have a negative impact on the Malaysian economy if the ringgit strengthens alongside other regional currencies like the Thai baht, Singapore dollar, the Indonesian Rupiah and Philippines peso.
‘Overall, it’s good for the economy. It won’t have an adverse impact at the macro level,’ he said. ‘Some industries may feel the pressure, but it can push them to be more competitive and improve efficiency.’
Economists say the risk remains that Southeast Asian manufactured exports could become less competitive as prices rise. However, either way, companies will need to improve productivity and become more efficient in order to maintain their competitiveness.
And that wouldn’t be bad thing as interest rates need to rise to curb inflation, which hits poorer Southeast Asian families at the kitchen table.
With more capital flooding into the region and feeding inflation, The Philippines, Vietnam, Malaysia and Indonesia have already tightened monetary policy amid fears food prices could reach uncontrollable levels. The Asian Development Bank (ADB) has also warned Asian governments must keep a tight rein on inflation and may need to consider controls on incoming capital.
‘Inflation will need to be carefully managed using a mix of policy measures—especially given the harder impact of inflation on the poor, which in Asia still number in the hundreds of millions,’ ADB President Haruhiko Kuroda told a recent news conference in Vietnam.
The Manila-based bank has noted that governments have already moved to soften the impact of food inflation through measures including tax cuts, price controls and subsidies.But it also says more needs to be done in the region as global food prices threaten to push tens of millions of Asians into extreme poverty, and this will cut the region's lofty economic growth targets for this year.