BANGKOK - Southeast Asian leaders gathered in Thailand this month vowed
collectively against a lurch towards protectionism to cushion their
trade-geared countries against rising global economic turbulence. What they
failed to rule out were competitive currency devaluations in a race to the
bottom for export market share.
The collapse in global trade is hitting Southeast Asia's economies particularly
hard. From a peak in July, the region's exports fell 35% in dollar terms
through December. The region's main value-added exports, such as electronics
and autos, as well as tourism, are expected to fall this year by anywhere
between 20% and 30%, while merchandise exports may dip by around 10%-20%,
according to economists.
With those shrinking receipts, economic growth is sliding fast across Southeast
Asia and is expected to turn negative this year
in Singapore, Malaysia and Thailand, the region's three most open economies.
Investment bank Credit Suisse estimates that every 10% drop in goods and
service exports will shave 7.2%, 4.5% and 4.2% respectively off those three
countries' gross domestic product (GDP) growth rates.
Regional governments have readied fiscal stimulus packages and eased monetary
policy to help offset the loss in exports. But weak capacity to actually
implement spend-side fiscal measures mean they will have only a limited
stimulatory effect in countries like Thailand, Indonesia and the Philippines.
Meanwhile, interest rate cuts are not expected to spark new credit demand,
particularly in light of idle factory capacity and overall poor market
sentiment across the region.
Regional central banks say publicly that they have no intention of managing
their currencies lower. Indeed, many have committed billions of dollars in
reserves over the past year to maintaining particular currency moving averages.
But some financial analysts believe a tit-for-tat momentum is building among
regional countries that compete for the same export markets and that the
potential for full-blown competitive devaluations will grow as the impact of
lost export receipts drives up unemployment and unleashes other negative
second-round effects, such as asset price deflation, on regional economies.
The call to anti-protectionism during this month's Association of Southeast
Asian Nations (ASEAN) summit meeting was indicative of the 10-member grouping's
collective wishful thinking that the US and Western Europe will soon recover
and resume spending in a manner that allows them to export their way back to
economic health - as many did through depreciated currencies in the aftermath
of the 1997-98 Asian financial crisis. Many in the region are hoping for a
similar V-shaped, or at least U-shaped, recovery to begin in the second half of
this year. ASEAN is composed of Brunei, Cambodia, Laos, the Philippines,
Malaysia, Myanmar, Indonesia, Singapore, Thailand and Vietnam.
Yet it seems increasingly clear that the region's recent bumper export volumes
were part and parcel of a debt-binged bubble, particularly in the US and
Europe, which has now popped and is not likely to reflate to similar
proportions any time soon. Most regional governments have so far merely pulled
fiscal and monetary levers and none has moved to implement reforms aimed at
permanently weaning their economies off export dependence and promoting
structurally more domestic demand-led growth to fill the growth gap.
The push towards competitive devaluations - both against the US dollar and in
trade-weighted terms - could stem first from outside Southeast Asia - from
South Korea, which has been badly hit by the global financial meltdown. Swiss
investment bank UBS argues in a March 6 report that "the relative decline in
Korea's exchange rate will impact the competitive positions of ASEAN economies
as a [multinational corporation] export base". The South Korean won, in
trade-weighted terms, had through February depreciated by 35% off its 2006-2007
average, greatly enhancing its cost competitiveness vis-a-vis ASEAN exporters,
according to UBS.
The real effective exchange rates of Singapore, Thailand, Malaysia and the
Philippines had all slightly appreciated over that same time frame; the
Indonesian rupiah fell by 12% over the period. UBS recently revised down its
three-month currency forecasts for the region's top five economies, predicting
a slight market-driven, government-tolerated depreciation of each unit.
Because South Korea exports large quantities of telecommunication equipment,
road vehicles, rubber and metal products, it is most directly in competition
first with Thailand, second with the Philippines and third with Malaysia.
"If Korea is perceived as taking market share in part because of its more
competitive exchange rate, then the pressure may build to allow more nominal
exchange rate weakness on the part of ASEAN national governments," according to
the UBS research. "The rise in layoffs from the manufacturing sector in
particular may cause governments to reconsider their positions [against
devaluing] in private."
Depreciatory vanguard
As those pressures mount, some analysts predict, Thailand would likely lead the
way towards a managed devaluation. Apart from recession-hit Singapore,
Thailand's trade-dependent economy, where exports account for around 65% of
GDP, compared with only 35% in 1998, is falling faster than its less
trade-geared regional neighbors. Exports in January fell 26.5% year-on-year and
growth is expected to remain negative throughout the year. UBS predicts the
Thai economy will shrink 5% this year.
The collapse in global trade has exposed Thailand's uneven economic development
and over-reliance on manufacturing, meaning no amount of fiscal pump-priming or
interest rate cuts will spark the domestic demand-led growth needed to replace,
even marginally, lost export receipts, economists say. Both the Philippines and
Indonesia, countries with lower GDP per capita ratios than Thailand, have
higher domestic demand components as a percentage of GDP in their respective
economic growth mixes.
Sriyan Pietersz, head of research at JP Morgan Chase in Bangkok, predicts the
Thai economy will shrink 3% this year. He bases that projection partially on
the fact the actual cash stimulus in the government's fiscal package amounts to
a paltry 0.3% of GDP and that monetary policy options are closing with the
benchmark lending rate already at 1.5%. With public debt at only 38% of GDP and
the potential for off-shore borrowing through a sovereign bond issue, he
believes Thailand has more fiscal room to spend.
Still, Pietersz believes that three months of fiscal-led stabilization in China
- including a 17% year-on-year gain in auto sales in February - will spur some
ASEAN countries to try to export more to China through currency devaluations.
He also points to a 0.5% month-on-month uptick in consumer spending in the US
in February as another potential export incentive for weakening regional
currencies.
"There was no [currency] pressure until now, with external demand down," he
says.
He believes the Bank of Thailand (BoT) has already allowed the baht to slide
around 4% so far this year to "catch up" with Singapore, where the currency has
fallen this year around 7.5% against the US dollar. "There is no strength or
stability in the baht," Pietersz says, noting that the BoT has recently
narrowed its forward contracts in defense of the baht to around $5 billion from
$26 billion. "The question is how they will manage the downward adjustment."
Others believe that the region's central banks are acutely aware of the
inflationary and other financial risks of competitive devaluations and will
steer clear of any aggressive downward movements of their currencies.
Cem Karacadag, a Credit Suisse economist who covers Southeast Asia, says that
"there is empirical evidence to show that export performance is determined by
external demand rather than price competition" and that "regional policymakers
understand this. He argues that any nominal depreciation seen in regional
currencies against the US dollar is being market-driven rather than policy-led.
Because most of the region's currencies operate under a managed rather than a
free-floating mechanism, that distinction is often difficult to make. With high
levels of international reserves, relative healthy bank balance sheets and
de-leveraged corporations, Southeast Asian countries and their currencies
should, in pure monetary textbook terms, be rising, not falling, against the
debt-laden US dollar and thus sparking more domestic-led investment and
consumption.
But the market has clearly put a premium on the US's comparative ability to
consume, innovate and print more of the world's reserve currency. And as fiscal
and monetary policies inevitably fail to spark sufficient new growth, and
second-round effects bite deeper into local economies, the temptation to manage
currency depreciations will likely be more than many Southeast Asian
governments and their central banks can resist.
Shawn W
Crispin is Asia Times Online's Southeast Asia Editor. He may be reached
at swcrispin@atimes.com.
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