Who’s afraid of Southeast Asia’s weak currencies?

Southeast Asia stands as a beacon of optimism while the global economy is in dire straits. In the face of high interest rates and China’s slowdown, which have depressed overall external demand, global growth has been relying heavily on the resilience of economies part of the ASEAN.

Some, however, fear that the slowdown of major economies like the US and China are also pulling down growth prospects in the ASEAN, with China a major export destination for goods. To add, still elevated interest rates have discouraged borrowing for new investments and even for productive activities.

We argue that there is no reason to be nervous and turn away from Southeast Asia.

Behind “weak” currencies

ASEAN currencies have collectively weakened against the US dollar by an average of 5 per cent in the first half of 2024, as seen in Graph 1.

The Thai baht had been the worst performer in the first semester as it depreciated by 6.8 per cent against the dollar relative to its end-2023 level, followed by the Indonesian rupiah that slipped by 6.3 per cent. Compare this to the 14.2 per cent decline of the Japanese yen against the US dollar and to the 6.7 per cent slide of the Korean won as of end-June.

Clearly, the depreciation of Southeast Asian currencies is not a cause for concern as this is attributable to the US dollar’s relative strength against all other currencies. In fact, there has been some appreciation among ASEAN currencies as of mid-August, but still weaker than the exchange rates from December 2023. The Federal Reserve remains reluctant to undo the series of interest rate hikes it unleashed in the past two years meant to tame rising inflation, which continues to hover above its 2 per cent target. 

The depreciation means Southeast Asia residents have to spend more of their domestic currency to afford imported goods. It must be noted that the currency decline is less steep for countries with governments that have made good progress in improving their fiscal positions, as seen in declining debt-to-GDP ratios and narrower trade deficits. The Singaporean dollar, representing a developed economy which saw faster growth in the first quarter given the recovery in exports and tourism receipts, only declined by 2.8 per cent against the US dollar. The Malaysian ringgit weakened by a relatively soft 2.7 per cent compared to the US dollar with brisker economic activity reported in January-March.

Among the worst performers, the Thai baht’s decline was likely exacerbated by the country’s failure to reverse its growing debt burden since the pandemic years as well as the political pressure perceived between the Bank of Thailand and Prime Minister Srettha Thavisin, who earlier called for the central bank to reduce interest rates to encourage a recovery in private consumption.

We believe there is no reason for investors to pull back from the ASEAN simply because of depreciating regional currencies. Growth prospects remain bright here, and the recovery of these currencies is forthcoming once the US Fed unleashes a rate cut in September.

Policy makers have also been agile in providing a boost to the economy. The Bank of Indonesia surprised markets when it raised the key interest rate to 6.25 per cent in April to prop up the rupiah since it began trading at the level of IDR 16,000 per USD 1.

Governments have also been vigilant firefighters upon detection of early warning signs of financial trouble, learning from the preconditions of the 1997 Asian Financial Crisis. These include heightened financial vulnerability, deteriorating current account balances, a rapid increase in both external and domestic borrowings, and brewing asset price bubbles. Malaysia, Indonesia, and the Philippines are among the countries successful in reducing their debt-to-GDP ratios in the years following the COVID-19 crisis, building their creditworthiness and freeing up more resources for productive spending.

Global growth centre

Despite some currency weakness, ASEAN economies will continue to propel global economic activity in the years to come –– a slowing Chinese economy and high interest rates aside.

The Fed’s impending rate cuts are a question of when, not if. Once rolled out, it would trigger the return of capital investments back to Southeast Asia where growth prospects are rosier.

The ASEAN is also a self-propagating growth centre. Graph 2 shows that ASEAN economies look inward for foreign direct investments (FDIs), a move that builds and sustains the region’s reputation as an attractive investment destination. Annual intra-ASEAN FDI inflows averaged nearly USD 24 billion between 2014-2023, with its 10 member-states accounting for about 16 per cent of inbound FDIs on average. The share of within-region FDI inflows peaked in 2016 when it accounted for 22.9 per cent of total inbound investments that went into ASEAN economies.

New industries are blossoming in the region, creating new opportunities for foreign investors. Promising contenders for additional FDIs include Indonesia’s electric vehicle assembly and parts manufacturing, as well as Vietnam’s electronics and textiles exports, the latter supporting a sizeable current account surplus.

Like any other economic bloc, Southeast Asia is never spared from risk events. However, we believe that the ASEAN will remain a bright spot in the middle of a gloomy global economy. Southeast Asian economies are consistently in need of greater FDIs to expand production, and ASEAN’s population of about 670 million should provide confidence that there is a robust internal market that would drive productivity, consumption, and therefore economic expansion. As it stands, fears of a currency crisis are just that – a fear that should resolve itself sooner rather than later.