It’s a RRRout as rupee, rupiah, ringgit get hit

PUBLISHED AUGUST 22, 2013

It’s a RRRout as rupee, rupiah, ringgit get hit

Though it’s not a rerun of 1997-98, regional currencies may weaken further against US$

SIOW LI SEN LISEN@SPH.COM.SG

‘Both investors and businesses are likely to benefit from using any lulls in the sell-off to raise their exposure to the US dollar.’

– Manpreet Gill, Standard Chartered Bank

[SINGAPORE] Plummeting Asian currencies – especially the Indian rupee and the Indonesian rupiah – have raised the spectre of contagion as international investors tend to paint the region with the same brush. The Malaysian currency was also hit as some spoke of the RRR – rupee, rupiah, ringgit – getting hammered. But analysts said Asia is not in dire straits although, in the short term, they warn of more volatility as international investors are not discerning when they exit markets.Yesterday, the Indian rupee fell to an all-time low of 64.52 against the greenback. Meanwhile, the Indonesian rupiah languished at 10,775 and the ringgit at 3.29 against the US dollar.

There is a risk that the volatility in these markets could spill over to the rest of Asia and other emerging markets if capital controls to limit outflows are implemented, said Andre de Silva, HSBC head of Asia Pacific rates.

“Our base-case scenario is that strict capital controls are unlikely, nor is a rerun of the Asian financial crisis of 1997/98, as Asia is in significantly better shape,” he said.

“We have seen from previous experience that when investors start to pull money out from emerging countries en masse, the exit can be painful,” said Marc Lansonneur, Societe Generale Private Banking (Asia Pacific) regional head of investment teams and market solutions.

Said Richard Titherington, JPMorgan Asset Management chief investment officer for emerging market equities: “A rising US dollar is worrying for emerging markets. US assets become more attractive.”

He added: “We always tell our investors that emerging market currencies are very volatile.”

The rupee and rupiah – the worst hit Asian currencies in this turmoil – have been hammered as investors focused on the current account deficits of the two countries.

Indonesia reported last Friday a sharp increase in Q2 current account deficit to 4.4 per cent of GDP from 2.4 per cent previously, and the rupiah was sold off more than 4 per cent.

For the year, it has depreciated more than 13.6 per cent against the US dollar to a four-year low.

India, which reported a Q1 current account deficit of 4.8 per cent of GDP is the worst hit Asian currency this year, falling more than 15.3 per cent this year to touch a historical high of 64.52 against the US dollar.

ANZ senior FX strategist Khoon Goh said there have been both global and specific local factors at play that have driven regional currencies lower.

“At the global level, increasing expectations of QE (quantitative easing) tapering by the US Federal Reserve and diverging growth momentum between the US and Asia have seen a reassessment by investors, who are now withdrawing capital from Asia to reallocate to developed markets,” he said.

The problem with exits is that investors use the same brush to paint the region, said Philip Wee, senior currency economist at DBS Bank.

So Malaysia, which has a current account surplus, albeit a shrinking one, has seen its currency fall too; the ringgit is down 5.37 per cent against the US dollar from a year ago.

Some are talking about the RRR trio – rupee, rupiah and ringgit, said a weary Mr Wee, hoarse from trying to show investors the difference between the three. “It’s not fair to put them in the same category,” he said.

In Malaysia, there is increasing focus on the country’s fiscal position and debt, said Ho Woei Chen, United Overseas Bank economist.

Fitch cut its outlook on Malaysia’s sovereign credit rating to negative from stable on July 30, citing its rising debt levels and lack of budgetary reform.

“Although Malaysia’s current account is expected to remain in surplus this year, we expect it to be reduced to around 4.2 per cent of GDP in 2013 from 6.1 per cent in 2012,” said Ms Ho.

Sim Moh Siong, Bank of Singapore currency strategist, added that the ringgit is also highly vulnerable to global investor sentiment given the high foreign ownership of the bond market.

“Foreign investors hold close to 50 per cent of outstanding Malaysian government debt – the largest share among all countries in the region,” he said.

So what should investors with exposure to regional currencies do?

“I’m treating the first tapering as an event risk which the market is discounting ahead of time,” said Mr Wee of DBS, who recommends hedging on a short-term basis.

Manpreet Gill, Standard Chartered Bank head of fixed income, currencies and commodities investment strategy, also said businesses are likely best served by hedging FX exposure, where appropriate.

Otherwise, Mr Gill said the bank continues to believe that the US dollar is likely to strengthen gradually against Asian currencies over the long term.

“Both investors and businesses are likely to benefit from using any lulls in the sell-off to raise their exposure to the US dollar,” he said.

For the brave, onshore investors in affected countries are presented with good opportunities in short-term debt.

“In India, for example, short-term government and corporate debt now offer double-digit yields, higher than those on long-term debt. This is a fantastic opportunity for investors to lock in attractive yields when held to maturity,” said Mr Gill.