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The baht’s credit-crunch derived decline looks but a blip (see chart, right) as the currency’s long term uptrend, which dates back to the latter half of 2005, remains not only in tact, but even more steadfast as the central bank predicted earlier this month that the economy would grow in 2010 (its 2Q10 yoy growth stood at 9.1%) at the fastest pace since 1995. And per The Economist last week, the IMF predicts full-year growth of 7%, ahead of Malaysia, Indonesia and the Philippines. Undeterred by the potential for trade competitiveness erosion (exports rose for a 10th straight month in August versus last year, buoyed by a healthy demand for auto parts and electronics), Thai Finance Minister Korn Chatikavanij told reporters on Wednesday that the baht’s gains were “unavoidable” because of the strong economy and that the currency was “likely to rise further” against the dollar. That said, not everyone is so sanguine: local traders opine that prices of rice, for instance, can be expected to rise further; the benchmark 100 percent B grade Thai white rice was steady at $490 per ton earlier this week “but could rise over the next few weeks given a stronger baht,” per reports. Moreover, worried about inflation the central bank last month raised interest rates for a second consecutive month, to 1.75 percent. And Thanawat Polwichai, director of the Economic and Business Forecasting Centre at the University of the Thai Chamber of Commerce, called on the central bank at the beginning of the month to help defend the currency’s seemingly unabated rise. “The BoT should tell the public of its policy to curb the baht’s value to suit the current economy,” Mr Thanwat said, adding to reporters that “if the Thai currency strengthens to less than 30 baht to the USD in the fourth quarter of the year, Thailand would face damage of about 100 billion baht in revenue lost in the export and tourism sectors, in turn shrinking GDP growth by roughly one percentage point.”
At 30.67 per dollar, just below its 13-month high, the baht has risen 8.8% this year, making it the third-best Asian performer after the Malaysian ringgit and the Japanese yen. In fact, Chatikavanij mused, the government’s plan to “fast-track infrastructure spending” would be aided by a stronger baht, since the cost of imports would be lessened. The strong currency and humming economy stands in stark contrast to ever-simmering political unrest which periodically boils over into full fledged street violence. Yet The Economist notes that “tourists have returned in search of beaches and bargains [and] investment continues to trickle in.”
A fairly recent WSJ piece highlights the reemergence of interest among many investors in frontier currencies, driven primarily by the persisting, low interest rate environment among more developed countries. Geoffrey Pazzanese, co-manager of the Federated InterContinental Fund (RIMAX), points to currencies in Vietnam, Kuwait and Indonesia in particular as currencies that diversifying investors seem especially keen on. That said, the piece notes, frontier currencies tend to be thinly traded, relatively speaking, and also may represent “complex currency systems that are strictly controlled by central banks, [such] as in Vietnam, [which] can also make it difficult to execute trades swiftly.” Per Vietnam, for instance, the central bank devalued the dong in mid-August for the third time in the past year to help curb a widening trade deficit, meaning that banks in turn will need to keep lending rates level or perhaps even raise them in order to keep their real rates positive. And because many analysts expect further devaluation in the future, the government’s benchmark rate of 8 percent is likely to rise as well. “All in all, the 2 percent devaluation came sooner than we had expected, but it was also smaller than we had expected,” Singapore-based Tamara Henderson, head of Asian foreign exchange research at Australia & New Zealand Banking Group Ltd., wrote several weeks ago. “We continue to expect a move to the 20,000 level in the dollar-dong in the first part of 2011.”
Investment manager Vietnam Holding offered words of encouragement in its May investor newsletter regarding the dong:
“Fears that a return to trend-line economic growth and the side-effects of last year’s economic stimulus package would result in a return of high inflation have proven to be premature. The consumer price index figure for May was just 0.3% month-on-month and 9.1% year-on-year. Crucially, food prices actually dropped in May, by 1.3% month-on-month, following an even steeper drop in April. So far this year, the consumer price index has risen by 4.6%, which includes the inflationary effect of the ‘Tet’ (lunar new year) holiday. The Government recently revised its inflation target for 2010 from 7% to 8%. Although much depends on the summer harvest and the impact of recent drought conditions, a 2010 inflation figure of 10% seems more likely.”
Vietnam’s persistent dong devaluation policy (February’s was its fourth since June 2008), while theoretically long-run inflation inducing, proceeds under the guise of shoring up the country’s trade deficit (its export market is founded upon an ever larger import one) while also tempting dollar hoarders to return cash into circulation and thus slow down the vicious circle whereby the central bank (SBV) sells dong to fund its hard currency needs. The IMF noted in early June that Vietnam’s foreign-exchange reserves had declined to the equivalent of about seven weeks of imports from less than 11 weeks in December. Inflation has dogged the country this entire decade, when market reforms unleashed a torrent of growth (GDP grew from 2000 to 2007 at an average of 7.5%) as well as a steady flow of foreign capital. And while the credit crisis eased inflation by depressing oil and food prices, exports slumped and FDI plummeted, causing the trade deficit to balloon, reaching $10.2 billion in the first 11 months of the year, while dollar sales aimed at stabilizing the dong shrunk foreign reserves.
Yet a ‘mixed signals’ policy may ultimately doom the dong. While the World Bank recently opined that confidence in the currency was “gradually returning,” for example, and that dong deposit rates were becoming more attractive, tempting local investors to shift their portfolios out of gold and foreign-currency assets, officials seem particularly keen to loosen monetary policy as soon as possible. The SBV, which has held its benchmark interest rate at 8 percent since December, stated in early June that it would try to ‘encourage’ commercial banks to reduce their lending costs because current interest rates were at a level that ‘hurts corporate profits,’ per its Deputy Governor Nguyen Van Binh. Analysts in general are bewildered. “Premature easing is the key risk to unraveling dong confidence, leading to another round of reserve deterioration,” warned Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup days later.
According to analysts with RBS Securities Inc., the decline of Colombia’s peso in light of Venezuelan President Hugo Chavez’s threat to freeze imports because of the country’s alleged cozy ties with U.S. “imperialists” may have more room to run in fact, given that the ascendancy of the world’s best performing currency YTD had come too far and too fast for the Central Bank’s tastes. Per Bloomberg reports, Colombia’s Agriculture Minister Andres Fernandez admitted last week that exporters such as coffee growers were vigorously urging the Bank to buy dollars in order to weaken the peso. That said, while a continued sell-off will inevitably hurt asset prices across the board, analysts warned of an overshoot. “We believe these episodes tend to elicit exaggerated reactions and do not affect underlying trends in a lasting manner,” said one.
Traders patiently watching the zloty’s climb against the dollar in 2009 have fairly good evidence of an imminent reverse trend. A glance at the five-year chart shows that USD/PLN has now twice bounced off some fairly important support levels. Furthermore, intuitively the breakdown makes sense. Per a Bloomberg report today, Ulrich Leuchtmann, head of foreign- exchange research at Commerzbank in Frankfurt, opined that currencies in eastern Europe were starting to come under pressure. “It’s a natural correction from the very upbeat sentiment that we saw recently. From a fundamental point of view such a quick recovery didn’t make much sense,” he said. Thanks to JB3 over at Xtrends, by the way, for pointing out this setup.
Crude’s run-up since 2006 helped Nigeria amass $51.32 billion of foreign reserves by the end of 2007 year end (it peaked at $63 billion last December), while the naira appreciated by roughly 10% against the US dollar. Its value then stabilized at around $116/US$1 until late November 2008. During this time, Nigeria became Africa’s largest FDI recipient, according to data from United Nations Conference on Trade and Development (UNCTAD).
When crude began its plunge, however, the Nigerian central bank (CBN) opted to begin to defend the suddenly vulnerable currency (caused by foreign investors selling the nation’s assets) by limiting sales of dollars to commercial banks in order to protect its reserves. Nonetheless, per Bloomberg, the country’s foreign reserves fell by more than $10 billion from the end of November, and sales of foreign exchange to banks dropped as low as $100 million in November compared with demand as high as $1.3 billion in the same month. According to one economist, Nigeria’s middle class of roughly 20 million people will have an estimated demand for foreign exchange of between $20 billion and $100 billion for the remainder of 2009.
So the question remains, exactly how long can/will the CBN essentially burn through its reserves defending the naira? “We don’t want to repeat the Russian experience of spending reserves to defend currency. We cannot do it forever,” said Chukwuma Soludo, the CBN governor, who also reiterated that he’d ultimately like to allow the naira to trade “within a band of plus or minus 3% from the central bank’s rate”, without specifying the target level. Many observers point out that further defense may be fruitless anyway, or even counter-productive and contrary to pragmatic, longer-term measures to, say, address the fiscal deficit or fund additional and much-needed infrastructure investment? Of greater concern may be Nigeria’s credit ratings. S&P, which affirmed Nigeria’s “BB-” foreign currency and “BB” local currency long-term sovereign credit ratings in late March, concurrently lowered the nation’s ratings outlook to “negative” from “stable”, citing falling oil revenues which hurt public finances.
In the backdrop (or perhaps the forefront?) of Nigeria’s currency fiasco has been the role of speculators in the currency’s “parallel” market. When the CBN restricted commercial banks from reselling foreign exchange bought at auction or any other sources on the interbank market, the black market (not surprisingly) boomed. Rates reached as high as N190 per USD, which the CBN blamed on hoarding.
The Chilean peso has gained 8.6% this year, the biggest increase among the six most-traded currencies in Latin America. During Wednesday trading, however, that number fell, with the peso reaching 595.80 per dollar from 587.85 a day earlier.
That said, pending dollar sales by the Finance Ministry, announced on Feb. 23 as part of an economic stimulus plan, will extend the dollar’s slide during the coming weeks, according to Celfin Capital in Santiago. “We could reach 550-570 [per dollar],” noted the firm’s head economist, Cristian Gardeweg.
Is an RMB (yuan) depreciation in the offing? Michael Pettis, a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, noted Monday that President Hu Jintao’s speech at this past weekend’s Politburo meeting leaves some wondering.
According to today’s People’s Daily, besides warning “that the global financial turmoil will make it harder for China to maintain the pace of its economic development in the near future”, [Hu] said, in a widely noted comment, that “with the spread of the global financial crisis, China is losing its competitive edge in the world market as international demand is reduced.”
What exactly does this mean? It is worth noting that this has come in the context of recent RMB weakness. According to a Bloomberg piece today, “China’s yuan fell by the most in seven weeks, three days before U.S. Treasury Secretary Henry Paulson visits Beijing for trade talks, on speculation the central bank wants to weaken the currency to spur the economy.” Meanwhile calls for depreciation of the RMB are getting more common, and more and more commentators are beginning to wonder if we might not see a conscious strategy of RMB depreciation.
The yuan has been somewhat of a ‘safe haven’ these past few months, which in turn has helped cushion other regional ‘proxy’ currencies such as TWD, MYR, and HKD. But a weakened yuan, likewise, could cause an exodus of capital that would extend into the other Asian economies.
JGW
Frontier Markets 