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The rupiah and ringgit plumb depths unseen since the Asian financial crisis
Aug 14th 2015 | SINGAPORE
This article was originally published in last week's print edition. However,
since Tuesday, many south-east Asia currencies, as well as China's, have fallen
sharply in value (see chart). Since this article is so relevant to the events
of the past week, we decided to republish it on the blog:
NOT since Bill Clinton was president and Barack Obama was a law professor with
a sideline in local politics have the beaches of Bali and Langkawi looked so
inviting to Americans. Four years ago, a dollar fetched just over 8,500
Indonesian rupiah, and just under three Malaysian ringgit. Today a dollar is
worth nearly 14,000 rupiah and almost four ringgit. Both currencies hit 17-year
lows this summer, and kept falling (see chart).
In one sense, Indonesia and Malaysia are far from unique: declining commodity
prices, the slowdown in China and the growing likelihood of an interest-rate
rise in America have combined to make 2015 a miserable year for emerging-market
currencies. Brazil and Russia are in recession, sending the real and the rouble
falling. Turkey, with its slowing economy, huge current-account deficit and
growing political instability, has seen the lira decline steeply; the Chilean,
Colombian and Mexican pesos have all drooped.
But in Asia the rupiah and ringgit lead the race downwards, having fallen by
8.4% and 9.8% against the dollar this year much further than the Thai baht
(6.4%) and the Philippine peso (2.2%). Their problems are exacerbated not just
by the Indonesian and Malaysian economies heavy dependence on commodities, but
also by political ructions in both countries.
Start with commodities. The halving of oil prices over the past year has harmed
Malaysia, which depends on oil for about 30% of its revenue. Indonesia is a net
importer of oil, but other commodities still comprise around 60% of its exports
a worry, given that The Economist s commodity index, which excludes oil, has
declined by almost 20% over the past year. Thailand and the Philippines, in
contrast, both have sizeable advanced manufacturing sectors: their top exports
are computers and electronic components.
China s slower growth and waning appetite for commodities have also been a drag
on Malaysia and Indonesia. China is the top destination for exports from the
Philippines too, but remittances from the millions of Filipinos working abroad
have helped prop up domestic demand, thus cushioning the blow of falling income
from exports.
Indonesia s current-account deficit and the big share of its government debt in
foreign hands will make it particularly susceptible to capital outflows in the
event of a rate rise in America. (Foreigners also own a lot of Malaysia s
debt.) Even more worrying, much Indonesian borrowing, both corporate and
sovereign, is dollar-denominated, meaning that as the rupiah falls the cost of
debt service rises.
In response to these woes, Indonesia has fallen back on protectionism, as
usual: in July it imposed import tariffs on a range of consumer goods,
including coffee, cars and condoms. Despite much talk from the president, Joko
Widodo, about upgrading his country s infrastructure, little has been done. He
came into office nearly a year ago with great promise, but some investors have
started to wonder whether he is up to the job of pushing through the reforms
his country desperately needs.
As for Malaysia, its foreign reserves look set to drop below $100 billion,
depriving it of a much-needed buffer, and suggesting the government may have
tried to prop up the ringgit. The woes of its prime minister, Najib Razak, who
for months has been trying to dispel allegations of corruption, may intensify
investors jitters.
The question now, for both countries, is how long the pain will last. Many
predict that commodity prices will rebound; fewer predict when. In the
meantime, depreciation should make their exports more competitive, but low
commodity prices seem to be offsetting that gain. Indonesia is growing at the
slowest pace since 2009. The falling currencies in both places are also stoking
inflation. Whenever the Fed gets around to raising rates, these ailments will
presumably worsen.