World Economy

As Currencies Weaken, Asian CBs Revert to Classic Defense

As Currencies Weaken, Asian CBs Revert to Classic DefenseAs Currencies Weaken, Asian CBs Revert to Classic Defense

To deal with a familiar combination of falling currencies and uncertainty about economic growth, Asian central banks are reverting to their classic policy playbook. They are intervening in currency markets while concurrently injecting cash into their economies.

The currencies of Asia’s economies with relatively high interest rates, such as Indonesia, India and the Philippines, are each down about 3% this year because they are facing a series of challenges, including competition for funds from rising US Treasury yields, a resurgent US dollar, and the rising tensions over global trade and capital outflows as US President Donald Trump pushes his “America First” agenda, Menafn reported.

As well as the risk that trade tensions could disrupt the region’s supply chains, these economies are already dealing with some slackness in the export orders that had lifted growth in the past year.

In Indonesia, the rupiah has fallen 5% in three months. Bank Indonesia has persistently sold dollars to put a floor under its currency. At the same time, it is buying bonds to replenish the rupiah it has absorbed through that intervention.

Despite paring a big chunk of their holdings in the past 6 to 8 months, foreigners still hold 40% of Indonesian government bonds and 45% of Malaysia’s.  

“Capital flows into Asia, not only because of interest rate differentials, but it’s also about the growth prospects and the investment returns including those in real projects,” said Frances Cheung, head of Asia macro strategy at Westpac. “For Indonesia in particular, we think raising interest rates should be the last option.”

Bank Indonesia spent about $6 billion of its reserves in February-March to defend the rupiah. The currency has over the past couple of weeks stabilized around 13,950 per dollar.

While Malaysia and Thailand can count on their local pension funds and state institutions to support the bond market in a crisis, that support isn’t as clear cut in India and Indonesia. India is therefore liberalizing bond investment rules to entice more foreigners.

Analysts expect that even South Korea, whose currency has the buffer of a huge current account surplus, will release funds into the market by going easy on bond issuance in the latter half of the year, just to compensate for the foreign capital outflows.

The Philippine central bank has said it is content to leave monetary policy as is, despite rising inflation, a weak peso and falling stock market.

Add new comment

Read our comment policy before posting your viewpoints