Southeast Asia’s dwindling foreign-exchange holdings are exacerbating the risk of a currency war as policy makers have little choice but to allow weaker exchange rates.
Malaysian reserves have fallen 19 percent this year to US$94.5 billion, reducing the central bank’s ability to stem a 17 percent drop in the ringgit.
Indonesia’s stockpile, which shrank 6.9 percent in the five months through last month, may come under greater pressure after Bank Indonesia said on Friday that it would seek to prevent the rupiah, which is down 12 percent this year, from “overshooting.”
Regional currencies are retreating across the board as sliding prices for Southeast Asia’s commodity exports coincide with a yuan devaluation and the prospect of higher US interest rates. Vietnam responded to the slump in China’s currency with a devaluation of its own. Credit Suisse Group AG says Thailand is favoring depreciation to revive an economy expanding at the slowest pace in the region after Singapore.
“We are deeper and deeper into a more and more worrying currency war,” Rabobank Group head of financial markets research Michael Every said.
“In some cases, it’s a deliberate policy. In others, it’s not that they’re looking for a currency war, they’re just looking to domestic fundamentals,” he said.
The ringgit led a drop in Southeast Asian currencies yesterday, falling 1.1 percent as of 12:27pm in Kuala Lumpur, according to data compiled by Bloomberg. The Philippine peso and the Indonesian rupiah lost 0.7 percent and Thailand’s baht was down 0.2 percent.
Malaysia’s reserves are enough to finance 7.5 months of retained imports, the central bank said in a statement on Friday. Indonesia’s reserves of US$107.55 billion at the end of last month are sufficient to cover seven months of imports, according to figures from Bank Indonesia.
The drop in Malaysian reserves was anticipated and the central bank is to set about rebuilding them, Bank Negara Governor Zeti Akhtar Aziz said on Aug. 13.
“We have high levels of reserves and that is what reserves are for, to represent buffers during this period,” she said on Thursday.
“We have held more than the amount of reserves our country needs, precisely for reversals,” she added.
Bank Indonesia Director Nanang Hendarsah said on Aug. 5 that foreign-reserves ammunition needed to be conserved to manage the currency.
The stockpile is still adequate and there is a need to prevent the rupiah overshooting more, he said on Friday.
“I don’t see any signs that Bank Indonesia is trying to hold the rupiah at a certain level,” PT Mandiri Sekuritas economist Leo Rinaldy said.
“It’s more focused on smoothing volatility,” he said.
Other Southeast Asian currencies have dropped less than the ringgit and rupiah this year. The baht is down 8 percent, Vietnam’s dong declined 5 percent and the Philippine peso has slipped 4.4 percent.
Using the exchange rate as a tool to boost trade could led to unintended consequences such as triggering competitive devaluations across the region, Philippine Finance Secretary Cesar Purisima said on Sunday.
“Gains from devaluation would eventually be weighed against costs as investors may view the weakening yuan as a one-way bet and stoke fears of capital flight,” he said.
Thailand’s foreign-exchange reserves fell 1 percent this year to US$155.3 billion as of Aug. 14, according to central bank figures released on Friday.
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