Southeast Asia
Mar 12, 2009



ASIA HAND
Race to the bottom
By Shawn W Crispin

BANGKOK - Southeast Asian leaders gathered in Thailand this month vowed collectively against a lurch towards protectionism to cushion their trade-geared countries against rising global economic turbulence. What they failed to rule out were competitive currency devaluations in a race to the bottom for export market share.

The collapse in global trade is hitting Southeast Asia's economies particularly hard. From a peak in July, the region's exports fell 35% in dollar terms through December. The region's main value-added exports, such as electronics and autos, as well as tourism, are expected to fall this year by anywhere between 20% and 30%, while merchandise exports may dip by around 10%-20%, according to economists.

With those shrinking receipts, economic growth is sliding fast across Southeast Asia and is expected to turn negative this year



in Singapore, Malaysia and Thailand, the region's three most open economies. Investment bank Credit Suisse estimates that every 10% drop in goods and service exports will shave 7.2%, 4.5% and 4.2% respectively off those three countries' gross domestic product (GDP) growth rates.

Regional governments have readied fiscal stimulus packages and eased monetary policy to help offset the loss in exports. But weak capacity to actually implement spend-side fiscal measures mean they will have only a limited stimulatory effect in countries like Thailand, Indonesia and the Philippines. Meanwhile, interest rate cuts are not expected to spark new credit demand, particularly in light of idle factory capacity and overall poor market sentiment across the region.

Regional central banks say publicly that they have no intention of managing their currencies lower. Indeed, many have committed billions of dollars in reserves over the past year to maintaining particular currency moving averages. But some financial analysts believe a tit-for-tat momentum is building among regional countries that compete for the same export markets and that the potential for full-blown competitive devaluations will grow as the impact of lost export receipts drives up unemployment and unleashes other negative second-round effects, such as asset price deflation, on regional economies.

The call to anti-protectionism during this month's Association of Southeast Asian Nations (ASEAN) summit meeting was indicative of the 10-member grouping's collective wishful thinking that the US and Western Europe will soon recover and resume spending in a manner that allows them to export their way back to economic health - as many did through depreciated currencies in the aftermath of the 1997-98 Asian financial crisis. Many in the region are hoping for a similar V-shaped, or at least U-shaped, recovery to begin in the second half of this year. ASEAN is composed of Brunei, Cambodia, Laos, the Philippines, Malaysia, Myanmar, Indonesia, Singapore, Thailand and Vietnam.

Yet it seems increasingly clear that the region's recent bumper export volumes were part and parcel of a debt-binged bubble, particularly in the US and Europe, which has now popped and is not likely to reflate to similar proportions any time soon. Most regional governments have so far merely pulled fiscal and monetary levers and none has moved to implement reforms aimed at permanently weaning their economies off export dependence and promoting structurally more domestic demand-led growth to fill the growth gap.

The push towards competitive devaluations - both against the US dollar and in trade-weighted terms - could stem first from outside Southeast Asia - from South Korea, which has been badly hit by the global financial meltdown. Swiss investment bank UBS argues in a March 6 report that "the relative decline in Korea's exchange rate will impact the competitive positions of ASEAN economies as a [multinational corporation] export base". The South Korean won, in trade-weighted terms, had through February depreciated by 35% off its 2006-2007 average, greatly enhancing its cost competitiveness vis-a-vis ASEAN exporters, according to UBS.

The real effective exchange rates of Singapore, Thailand, Malaysia and the Philippines had all slightly appreciated over that same time frame; the Indonesian rupiah fell by 12% over the period. UBS recently revised down its three-month currency forecasts for the region's top five economies, predicting a slight market-driven, government-tolerated depreciation of each unit.

Because South Korea exports large quantities of telecommunication equipment, road vehicles, rubber and metal products, it is most directly in competition first with Thailand, second with the Philippines and third with Malaysia.

"If Korea is perceived as taking market share in part because of its more competitive exchange rate, then the pressure may build to allow more nominal exchange rate weakness on the part of ASEAN national governments," according to the UBS research. "The rise in layoffs from the manufacturing sector in particular may cause governments to reconsider their positions [against devaluing] in private."

Depreciatory vanguard
As those pressures mount, some analysts predict, Thailand would likely lead the way towards a managed devaluation. Apart from recession-hit Singapore, Thailand's trade-dependent economy, where exports account for around 65% of GDP, compared with only 35% in 1998, is falling faster than its less trade-geared regional neighbors. Exports in January fell 26.5% year-on-year and growth is expected to remain negative throughout the year. UBS predicts the Thai economy will shrink 5% this year.

The collapse in global trade has exposed Thailand's uneven economic development and over-reliance on manufacturing, meaning no amount of fiscal pump-priming or interest rate cuts will spark the domestic demand-led growth needed to replace, even marginally, lost export receipts, economists say. Both the Philippines and Indonesia, countries with lower GDP per capita ratios than Thailand, have higher domestic demand components as a percentage of GDP in their respective economic growth mixes.

Sriyan Pietersz, head of research at JP Morgan Chase in Bangkok, predicts the Thai economy will shrink 3% this year. He bases that projection partially on the fact the actual cash stimulus in the government's fiscal package amounts to a paltry 0.3% of GDP and that monetary policy options are closing with the benchmark lending rate already at 1.5%. With public debt at only 38% of GDP and the potential for off-shore borrowing through a sovereign bond issue, he believes Thailand has more fiscal room to spend.

Still, Pietersz believes that three months of fiscal-led stabilization in China - including a 17% year-on-year gain in auto sales in February - will spur some ASEAN countries to try to export more to China through currency devaluations. He also points to a 0.5% month-on-month uptick in consumer spending in the US in February as another potential export incentive for weakening regional currencies.

"There was no [currency] pressure until now, with external demand down," he says.

He believes the Bank of Thailand (BoT) has already allowed the baht to slide around 4% so far this year to "catch up" with Singapore, where the currency has fallen this year around 7.5% against the US dollar. "There is no strength or stability in the baht," Pietersz says, noting that the BoT has recently narrowed its forward contracts in defense of the baht to around $5 billion from $26 billion. "The question is how they will manage the downward adjustment."

Others believe that the region's central banks are acutely aware of the inflationary and other financial risks of competitive devaluations and will steer clear of any aggressive downward movements of their currencies.

Cem Karacadag, a Credit Suisse economist who covers Southeast Asia, says that "there is empirical evidence to show that export performance is determined by external demand rather than price competition" and that "regional policymakers understand this. He argues that any nominal depreciation seen in regional currencies against the US dollar is being market-driven rather than policy-led.

Because most of the region's currencies operate under a managed rather than a free-floating mechanism, that distinction is often difficult to make. With high levels of international reserves, relative healthy bank balance sheets and de-leveraged corporations, Southeast Asian countries and their currencies should, in pure monetary textbook terms, be rising, not falling, against the debt-laden US dollar and thus sparking more domestic-led investment and consumption.

But the market has clearly put a premium on the US's comparative ability to consume, innovate and print more of the world's reserve currency. And as fiscal and monetary policies inevitably fail to spark sufficient new growth, and second-round effects bite deeper into local economies, the temptation to manage currency depreciations will likely be more than many Southeast Asian governments and their central banks can resist.

Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be reached at swcrispin@atimes.com.

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rickfarang wrote:"...estimates that every 10% drop in goods and service exports will shave 7.2%, 4.5% and 4.2% respectively off those three countries' gross domestic product (GDP) growth rates. "

So by this estimate, Thailand is the most independ of the three countries with the most open economies. (Singapore, Malaysia, and Thailand, respectively) The Thai government(s) must be doing something right!