The Malaysian Reserve

EM currencies at the frontline of contagion fears

EMs and their respective currencies are back in the limelight thanks to all manners of political and economic turmoil, while the shadow of an impending trade war between China and the US hangs over all (Pic: TMRpic)

Asean currencies to face some selling pressure, but risk of contagion spreading will likely be contained

By NG MIN SHEN / Pic By TMR

The Indonesian rupiah has been experiencing a sell-off comparable to the 1998 Asian financial crisis, raising fears of contagion across emerging markets (EMs) which could hit the ringgit as well.

Investors are concerned that Indonesia’s high exposure to foreign loans — according to official data, about 40% of Indonesia’s public debt last year, was foreign-owned.

It also has a current account deficit of 3% of GDP.

This year alone, the rupiah has slipped nearly 9% against the US dollar. A presidential election is due in less than a month, with the Opposition zeroing in on growing national debt and foreign investments or partnerships with China, among other issues.

RHB Research Institute Sdn Bhd economics research head Peck Boon Soon said the sharp plunge in EM currencies, like the rupiah, Turkish lira and Argentina’s peso, has triggered fears of contagion.

“Inevitably, Asean currencies would face some selling pressure, but we believe the risk of contagion spreading will likely be contained. This is given Asean countries’ better economic fundamentals and flexible exchange rates, as well as their proactive moves to contain the risk of contagion,” he said in a note last Friday.

Malaysia hasn’t been spared by the EM turmoil, with the ringgit hitting a nine-month low last week at RM4.1445 against the greenback.

Some EM currencies like the Mexican peso are up 7.7% against the US dollar, followed by the Hong Kong dollar and Thai baht.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said risk aversion reigns as contagion fears linger.

“EM assets and currencies including the ringgit are likely to be affected by this, alongside the expected imposition of tariffs by the US administration following the expiry of public comment last Thursday,” he told The Malaysian Reserve.

Healthy readings from the US non-farm payroll — the country’s jobs report — last Friday also suggested the US Federal Reserve (Fed) will raise interest rates at its next meeting this month.

While Malaysia does not have a twin-deficit (current account and fiscal deficits) problem, Mohd Afzanizam noted the ringgit has lost about 0.86% against the US dollar for the month to date.

“In that sense, the ringgit could be least affected. The sup- port and resistance level is around RM4.09 and RM4.15. Perhaps the ringgit would linger around these levels in the immediate term,” he said.

EMs and their respective currencies are back in the limelight thanks to all manners of political and economic turmoil, while the shadow of an impending trade war between China and the US hangs over all. With contagion fears back, the following is a look at some of the most badly hit EM currencies in the past week.

The Turkish lira takes the cake — not so much in year-to- date (YTD) depreciation, rather for the infamy gained when the currency took its biggest weekly slide in over 17 years last month and ignited contagion fears for nearly every EM and EM currency.

At the height of the lira’s plunge, the sell-down was mainly driven by the continued stand-off between Turkey and the US over the detention of an American pastor, as well as the US’ doubling of import tariffs on Turkish steel and aluminium.

Turkey is also plagued by a current account deficit, high private sector debt levels and a large amount of foreign fund in the banking system.

As of last Friday, the lira was the second-worst performer in a basket of EM currencies, at 35% weaker against the US dollar YTD, though it later recovered to a one-week high on anticipation its central bank will raise interest rates to defend the unit.

The lira was edged out by the Argentine peso, which was down 40% YTD against the greenback. The peso also fell 16% in a week alone, some two weeks ago.

While Argentina’s economic woes have been growing for some time, the recent slide was mainly due to poor communication on the part of its government with regards to credit disbursements from the International Monetary Fund.

This only served to further spook investors, who have been pulling back since the country’s central bank slashed interest rates in January this year despite absent signs of slowing inflation while the nation’s top export, soy, was hit by a drought.

Despite Argentina’s efforts to hike interest rates, sell reserves and reduce spending quicker, its fundamentals are worse than Turkey’s — with Bloomberg Economics noting the South American nation having a larger fiscal deficit and higher inflation than Turkey.