Tuesday, March 10, 2009

RECESSION: Currency Defense Drops on Ringgit, Won on Exports

By Ye Xie and Bob Chen
March 9 2009

Asian central banks are abandoning a six-month campaign of defending their currencies, reversing course to cheapen exports that are falling the most in a decade.

Policy makers from India to Malaysia to Taiwan are letting their currencies depreciate after South Korea gave companies an edge by allowing the won to weaken 19 percent against the dollar this year. Shipments from South Korea, Indonesia, Taiwan and Malaysia fell 17 percent in January to $79 billion, twice the drop of April 1998, when the Asian financial crisis was wiping out a third of the region’s economy, according to data compiled by Bloomberg.

“Export markets have been forced to let their currencies weaken to try and keep up with the competitive depreciation in the won,” said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets LLC, which has $12 trillion under custody.

The won, India’s rupee and Taiwan’s dollar will decline against the U.S. dollar by 12, 13 and 6 percent, respectively, by the end of June, according to Stephen Jen, a Morgan Stanley currency strategist. Goldman Sachs Group Inc. says Singapore’s dollar will depreciate 3 percent by April. Malaysia’s ringgit will slip 5 percent by Sept. 30, says Calyon, a Credit Agricole SA unit in Paris.

Devalued currencies may throw a lifeline to exporters getting clobbered by South Korean competitors. Oppenheimer & Co. predicts Taiwan-based AU Optronics’s share of the global market for liquid-crystal displays in television sets and computers will drop to 15 percent this year, from 16.8 percent in 2008. The company posted a record loss of NT$26.6 billion ($764 million) for the fourth quarter.

Outperforming Taiwan

Its South Korean rivals, Samsung Electronics Co. and LG Display Co. will boost their combined LCD share to 44.9 percent, from 41.9 percent, Oppenheimer said in a research report to clients last month. Shares of those two companies have outperformed their Taiwan competitor by at least 21 percentage points since Sept. 30.

“There will no longer be meaningful interventions to prevent Asia-outside-Japan currencies from falling,” Jen said in a March 2 report from London. “There’s a genuine change in the currency policies of many Asian economies. A severe contraction in the trade surpluses clearly affects the relative supply and demand for dollars in these countries.”

Central banks intervene when they buy or sell currencies to influence exchange rates.

‘Stable’ and ‘Functioning’

Malaysia’s Bank Negara bought ringgit four months ago, helping it strengthen 4.5 percent against the dollar in December. The central bank said March 5 that the currency is now “stable” and “functioning on its own.” The ringgit fell 6.8 percent this year to 3.7203 today as it slipped toward the 3.80-per-dollar peg abandoned in 2005.

The Philippines won’t intervene to shore up the peso, Deputy Governor Diwa Guinigundo said March 4 as it approached the lowest level since Dec. 5. The peso ended a three-month slide in November after the central bank drew down its reserves by 2 percent the previous month, the biggest drop since 2005. The currency declined 2.5 percent to 48.620 per dollar this year.

Foreign reserves in India barely changed in February at $239 billion, indicating the central bank didn’t sell dollars to prop up the currency as the rupee shed 4.7 percent in its worst monthly performance since October.

Adnan Akant, foreign exchange chief in New York at Fischer Francis Trees & Watts, which oversaw $22 billion as of December, predicts Singapore’s central bank will widen its trading band to let the currency fall when policy makers hold their biannual meeting in April. He’s selling the city-state’s dollar, which depreciated 6.5 percent this year to S$1.5442 per greenback.

‘Engine’ for Growth

South Korea was the catalyst for the shift away from defensive intervention. After spending 22 percent of foreign reserves from August to November to stem won losses, South Korean Finance Minister Yoon Jeung Hyun said Feb. 25 that its weakness may be an “engine for export growth.”

The won’s 17 percent slide this year versus Asian counterparts is its steepest annual start since 1995, when Westpac Banking Corp. started to track the value of the currency on a traded weighted basis.

China’s $585 billion stimulus plan may halt or reverse Asian currency losses by spurring growth across the continent. Christy Tan, a currency strategist at Bank of America Corp. in Singapore, said the region’s economies and currencies are ready for a recovery.

‘Positive Implications’

“Asia as a whole continues to enjoy rather healthy trade surpluses,” Tan said. “We have an above-consensus forecast for China growth at 8 percent. That’ll probably have positive implications for the Asian currencies going forward.”

Malaysia, Southeast Asia’s second-largest oil and gas producer, has had trade surpluses every month since 1997. Singapore’s current account surplus will fall to 15 percent of its economy this year from 24 percent in 2007, according to forecasts of economists surveyed by Bloomberg News.

Akant said China’s stimulus will have limited impact because that country “can only help itself, but not enough to help all non-Japan Asia.”

The region is twice as dependent on exports as other parts of the world. Excluding imported components, international sales account for two-thirds of Singapore’s $161 billion gross domestic product, almost half of Malaysia’s $181 billion and Thailand’s $246 billion and a third of Taiwan’s $356 billion and South Korea’s $970 billion, according to Credit Suisse Group AG.

Malaysia’s exports fell the most in 15 years in January, down 27.8 percent from a year earlier after slipping 14.9 percent in December, the trade ministry said March 6.

Falling Exports

A Taiwan government report today showed exports fell 28.6 percent last month from a year earlier, following January’s record 44 percent drop, according to economists surveyed by Bloomberg News.

Taiwan, Singapore, Hong Kong and South Korea, once called the Asian Tigers, have entered recessions as Westerners cut spending on cars, TVs and semiconductors.

Singapore’s Chartered Semiconductor Manufacturing Ltd., the world’s third-largest maker of customized chips, said in January it may report record losses of between $142 million and $152 million in the first quarter and will cut 600 employees, 8 percent of its workforce.

The export-fueled “boom is going bust,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $46 billion. “The countries will survive, but not without a big adjustment in their currencies. They don’t mind seeing their currencies weaker.”

Leveraged to Growth

Singapore’s economy contracted at an annualized 16.4 percent rate in the fourth quarter, the most in at least 33 years. It will shrink another 3.5 percent in the first quarter, according to the median prediction in a Bloomberg survey of four economists. Taiwan’s gross domestic product is forecast to slow 2.7 percent this year, following a record 8.4 percent decline in the final three months of 2008.

“There’s a realization that the region is leveraged to global growth,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “Exports and industrial contraction are worse than the Asian crisis in 1997, 1998. They may have to debase their currencies.” He said he has “underweighed” the Taiwan dollar, the won and other Asian currencies since January.

After the bust of the housing bubbles in the region and the devaluation of Thailand’s baht prompted investors to flee the markets in 1997, industrial production in South Korea declined 13.5 percent in July 1998, from a year earlier. This past January, output dropped 25.6 percent, the statistics office said March 2.

Lower Interest Rates

Central banks from Indonesia to the Philippines are also weakening currencies by lowering interest rates. Though intended to boost growth, rate cuts also dim the appeal of their assets. The Reserve Bank of India reduced its benchmark repurchase rate to a record low of 5 percent from 5.5 percent on March 4, and from a seven-year high of 9 percent in September.

Investors are shunning emerging markets amid concern that the global recession will hurt these countries more than bigger economies. A combined $643 million evaporated in the South Korea, Taiwan and Thailand stock markets on March 2 alone, the most in three months, according to Calyon. The MSCI World Index fell 24 percent this year, compared with 14 percent for the MSCI World Index of developed nations.

“The same-old demand won’t come for the next five, 10 years,” said Scott Ainsbury, a money manager at FX Concepts, the world’s largest currency fund at $12 billion. “People may underestimate how far these currencies can fall.” Ainsbury said he’s selling the Taiwan and Singapore dollars and the won.

Worst Performers

The weaker won helped Seoul-based carmaker Hyundai Motor Co. increase U.S. sales 4.9 percent this year, while Toyota Motor Corp. in Tokyo, the world’s biggest auto manufacturer, saw sales drop 36 percent in the same period. The won depreciated 12 percent versus the Japanese yen this year, following a 40 percent drop last year.

So far in 2009, the won is the only Asian currency among the 10 worst performers in emerging markets, according to data compiled by Bloomberg. Hungary’s forint dropped 23 percent versus the dollar and Colombia’s peso lost 13 percent.

Central banks started to support currencies after the credit freeze that followed the collapse of the subprime mortgage market in August 2007, prompting foreign investors to withdraw funds. The defense intensified when Lehman Brothers Holdings Inc. collapsed in September, sending financial assets into a tailspin.

Foreign Reserves

As policy makers propped up exchange rates last year, foreign reserves in South Korea, India, Malaysia and Indonesia decreased to $589 billion on Dec. 31, from $745 billion on June 30.

For now, central banks have stopped fighting the depreciation.

South Korea’s foreign reserves were little changed at $201 billion in February as the won slumped 10 percent against the dollar, its worst month since November. The won also declined 19 percent this year against China’s yuan and 14 percent against Taiwan’s dollar on concern that a possible credit contraction would starve the nation of dollars needed to pay debts.

Weaker currencies alone won’t spur recoveries as the global recession deepens, said Mark Dow, a money manager at Pharo Management LLC, a New York-based hedge fund with $2 billion under management.

The International Monetary Fund sees a “serious risk” of a contraction in the worldwide economy this year and will probably cut its 0.5 percent growth estimate in April, Managing Director Dominique Strauss-Kahn said on March 3.

“If you lose your job and buy a flat-screen TV just because it’s 70 percent off, I bet your wife won’t be happy,” said Dow, who is selling currencies of Malaysia, Philippines, Taiwan and South Korea. “Price doesn’t matter. It’s a mistake for Asia to devalue their currencies. The thinking is wrong, but it’s happening.”