Southeast Asian currencies are tumbling, and that may be a good thing.
Indonesia’s rupiah and Malaysia’s ringgit have fallen to levels hit during the Asian financial crisis of 1997-98, leading a decline in the region’s currencies. The drop won’t spark the same economic meltdown this time around, according to analysts who watched the disaster unfold almost two decades ago. In fact, it could be a healthy realignment that helps boost exports.
The slide in currencies, exacerbated by China’s surprise devaluation of the yuan by the most in two decades last month and a strengthening U.S. dollar, is occurring amid lower external debt burdens, more flexible exchange rates and higher foreign-currency reserves than before. Most Southeast Asian economies now run current-account surpluses instead of the deficits they had before the late 1990s crisis.
“Things are fundamentally different now compared with 1997,” said Tomo Kinoshita, chief economist at Nomura Securities Co., who studied Asian economies over the past 18 years. “Authorities have introduced quite rigid prudential measures to avoid a currency crisis. The depreciation in the currency is a positive factor for the exports and general competitiveness of those Asian nations.”
Malaysia and South Korea have run current-account surpluses every year since 1998. And the region has accumulated foreign-exchange reserves. Indonesia’s stockpile is five times as large as it was 18 years ago, and Thailand’s six times. The four countries’ external debt -- excluding reserves -- has fallen from 60 percent of gross domestic product in 1997 to 11 percent of GDP, according to DBS Group Holdings Ltd.
“The region still has many buffers, so we are not in a repeat of the Asian crisis context,” said Anoop Singh, former director of the Asia and Pacific Department at the International Monetary Fund, who led missions to Thailand, Indonesia and Malaysia during the Asian crisis. “The U.S. is clearly recovering strongly and this is good news for the region and the global economy.”
Buffers for the region include banking regulations that were tightened in the wake of the Asian financial crisis itself, and the 2007-09 global credit crisis.
"In hindsight, without the Asian financial crisis, even just the banking system wouldn’t be as strong as now," Fauzi Ichsan, head of Indonesia’s bank-deposit insurance agency, said in an interview this week. Indonesia’s bailout package -- signed with the IMF chief standing over the country’s president in an infamous photograph -- proved useful in pushing reforms, according to Ichsan.
That’s starting to show: Indonesia’s shipments to the U.S., the country’s largest destination, rose 14 percent in August from July.
A U.S. recovery also has Southeast Asian policy makers bracing for an increase in interest rates by the Federal Reserve, which meets from Sept. 16 to Sept. 17, a move that may draw capital out of the region. However, outflows from Asia shouldn’t be significant, David Carbon, chief economist at DBS in Singapore, wrote in a Sept. 10 note.
“The amount of capital that does or doesn’t flow out of Asia in the weeks ahead will depend on three things: the strength of the U.S., the weakness of China and how much Asia today resembles the Asia of 1997,” said Carbon, who began covering Asian markets and economies in 1994, when the Fed began a monetary tightening cycle. “Fear not. The U.S. is not as strong as many believe. China is not as weak. And Asia today looks nothing like 1997.”
To be sure, some Southeast Asian economies are in a better position than others. The IMF in July warned about the “sizable” share of corporate debt in foreign currency as a share of GDP in Malaysia and Thailand.
On the government side, Malaysia and Indonesia’s local sovereign-debt markets are susceptible to shocks, given they have the highest proportion of offshore ownership in Southeast Asia: 38 percent in Indonesia and 32 percent in Malaysia.
Both economies have also been hurt by a slump in commodity prices and a loss of confidence in their governments, which have lowered forecasts for economic growth this year. Indonesia President Joko Widodo is struggling to deliver on promises to reform Southeast Asia’s biggest economy, while Malaysia Prime Minister Najib Razak is battling allegations he received billions of ringgit linked to a state investment company in his private bank accounts.
“I wouldn’t totally dismiss fundamentals,” said Daniel Martin, senior Asia economist at Capital Economics Ltd. in Singapore. “In some cases there’s been really excellent reasons why the currency has fallen, particularly those economies that are large net commodity exporters.”
Vietnam, which widened the dong’s trading band on Aug. 12 after China devalued, has seen its currency fall 2 percent against the U.S dollar since then. The dong’s depreciation will help companies that compete with China in markets such as the U.S. and Europe, according to Alan Pham, chief economist at VinaCapital Group, Vietnam’s biggest fund manager.
In particular, exporters of products including rubber, steel, sugar and seafood may benefit, said Pham.
“There isn’t any big reason to be all fearful about the prospects for Asian economies,” said Martin at Capital Economics. “The region will still remain one of the fastest growing in the world.”