PETALING JAYA – Emerging market contagion fears have put the currencies of countries with twin deficits under pressure.
These currencies have been hit hard with the Indonesian rupiah leading the fall and is now the second worst performing currency in the world.
With the dollar rising even further, the Indonesian rupiah is now testing its historical lows that were formed some 20 years ago at the height of the 1997-1998 Asian Financial Crisis. The Philippine peso has also dropped to multi-year lows against the dollar.
Analysts have said that what is happening this time appears to be a repeat of the events that sparked off the Asian Financial Crisis some 20 years ago.
“It’s a repeat of the situation that led to the Asian Financial Crisis. But it is not going to be a replay of the financial crisis for Malaysia as there is no current account deficit in Malaysia,” Interpacific Research’s head of research Pong Teng Siew told StarBiz.
The rupiah reached near its weakest levels of 14,938 per dollar since the 1997-1998 Asian Financial Crisis while the Philippine peso is also weaker at 53.6 against the dollar.
Malaysia, which does not have a twin deficit, saw the ringgit continuing its downtrend yesterday as the outlook for risk assets remained sober amid the broader sell-down in the region.
Malaysia has a current account surplus of RM3.9bil as of the second quarter, while the country runs a budget deficit.
The ringgit closed at RM4.15 to the dollar yesterday, at its nine-month low since November 2017, losing 2.88% of its value since the beginning of the year. The ringgit is the second best performing major currency in Asia this year.
“I believe the ringgit is quite fairly valued at this point. When compared with currencies of our major trading partners, they have also dropped.
“The drop is in line with what’s happening with currencies of our major trade partners. It may not depreciate a lot more but bear in mind that it can overshoot to the downside also,” Pong said.
The root of this latest bout of selling started when the Turkish lira was abruptly sold down in mid-August.
The lira had last month depreciated more than 18% within the span of about a week following the US’ decision to impose tariffs on its steel products.
President Donald Trump was widely believed to be sending a warning to the Turkish government with this tariff move after a pastor was arrested in the Middle Eastern country when he was accused of collaborating to overthrow the Turkish government.
It appears that the sell-down did not end there but the bearish sentiment simmered amid the strengthening dollar environment.
In addition to the South-East Asian countries mentioned above, other countries have also joined the season of selling: including Argentina and South Africa. The Indian rupee continues to fall to record lows against the greenback.
“The trade war between the US and China is not triggering the weakening of the emerging market currencies. This is because we have Turkey, Argentina and these countries have nothing to do with the trade war. Some emerging market currencies are in a weak position with their twin deficits,” Pong said.
“This drives home one point: to have prudent macroeconomic planning. Countries cannot wait to the last minute to do that but should always be aiming for sustainable growth. They should never run current account deficits in tandem with trade deficits or government deficits. This leads to speculative attacks and it leads to trouble in uncertain times,” he added.
It was reported also that data from the Institute of International Finance, which tracks financial flows showed inflows of foreign investor money into emerging economies shrunk to US$2.2bil in August as portfolio managers were rattled by rising trade tensions and a strong dollar.
Stock markets were engulfed in a sea of red yesterday, with Indonesia Jakarta Composite Index leading losses in the region falling by 3.67% to 5,688.83 and Hong Kong’s Hang Seng Index declining by 2.61% to 27,243.85 at press time.
All major Asian markets fell and the FBM KLCI retreated 0.95% to 1,795.50 with losing counters outnumbering gaining ones by 2.6 times with RM2.92bil worth of shares changing hands.
“The US economy looks quite strong today with their stock market index hovering at multiyear highs. But longer term indicators show that a recession could happen there earliest at the end of next year,” Pong said.
“We may just be beginning to enter a very bad phase in the market cycle but local funds have been supporting the index,” he added.