The recent appreciation of ASEAN currencies against the US dollar has sparked interest among investors and market analysts. While this rally may indicate economic strength, a deeper analysis suggests a more nuanced situation.
BCA Research examines the factors driving this currency appreciation, including economic fundamentals, global trends, and country-specific conditions. The focus is on the Malaysian ringgit, Thai baht, Philippine peso, and Indonesian rupiah.
ASEAN currencies have recently strengthened against the US dollar. However, analysts at BCA Research believe this appreciation is temporary. They argue that the underlying economic conditions, such as declining global exports and a potential shift towards riskier investments, favor the US dollar and may lead to a weakening of ASEAN currencies.
ASEAN currencies are heavily influenced by global economic conditions, particularly the manufacturing and trade cycles. A critical factor is the decline in global manufacturing orders, which has historically signaled a downturn in ASEAN currencies.
While recent improvements in exports have provided some support, the global economy is expected to experience a slowdown due to weaker domestic demand in the United States.
This economic downturn may lead to a period of risk aversion, where the US dollar appreciates and emerging market currencies, such as those in ASEAN, decline in value.
A closer look at the individual ASEAN currencies reveals varying degrees of vulnerability and resilience, influenced by both global and domestic factors.
Malaysia’s ringgit has recently strengthened, but this uptrend is likely to be temporary. The country’s trade surplus has shrunk, and its current account surplus is also decreasing.
As US demand for goods slows down, Malaysia’s trade and current account balances are expected to weaken further. This will put downward pressure on the ringgit, reversing its recent gains.
“Gross FDI inflows, at USD 10 billion annually, have not risen at all in the past decade. Net FDI is zero. Net portfolio inflows have been largely negative all these years,” said analysts from BCA Research.
Similarly, the Thai baht's recent rally is expected to be temporary. Thailand’s trade balance has slipped into deficit, and its current account balance has barely remained positive.
The collapse in export orders signals further weakening in the country’s trade and current account balances, which will likely lead to a depreciation of the baht.
Moreover, Thailand has faced persistent net outflows of FDI and portfolio capital for nearly a decade, a trend that is unlikely to reverse in the near term, especially given the country’s weak economic outlook and ongoing political uncertainties.
Despite recent gains, the Philippine peso is expected to continue falling in value. This is due to the country’s increasing reliance on foreign debt to finance its trade deficit.
As the gap between Philippine bond yields and US Treasury yields narrows, it’s likely that the Philippines will start borrowing less from foreign investors. This could lead to a significant depreciation of the peso in the near future.
The Indonesian rupiah, despite its recent rally, is also expected to weaken. Indonesia’s current account remains in deficit, and both its manufacturing and commodity exports are expected to remain sluggish.
This situation is exacerbated by Indonesia’s dependence on exports to China, which are particularly vulnerable given China’s tepid growth outlook. The resulting current account deficits will be challenging to finance, particularly as Indonesia’s capital account has returned to deficit, with net debt portfolio inflows turning negative.
Given the country’s weak profit growth and limited attraction for other forms of capital inflows, the rupiah is likely to face further depreciation.
BCA Research warns investors against chasing the recent rally in ASEAN currencies. While the Malaysian ringgit and Thai baht may outperform other emerging market currencies during a potential global market downturn due to their strong financial positions, the Philippine peso and Indonesian rupiah are expected to struggle due to their weaker economies and reliance on borrowing.
BCA Research suggests that investors maintain a short position on the peso and rupiah compared to the US dollar. They expect that the ringgit and baht will outperform other emerging market currencies over the next six to nine months. However, the rupiah and peso are expected to continue to depreciate.