Weakness in the US dollar is set to ease debt-servicing costs and reduce incentives to hold dollar interest bearing assets, and thereby relieve the downward pressure on ASEAN currencies, say HSBC economists in their latest report on Asian currencies. However, declining export growth rates, external debt, political uncertainty and financial and corporate restructuring in most ASEAN nations means that domestic economies are likely to remain weak, hence mitigating the positive effect of the weakening dollar.
Also, an expected slowdown in the electronics exports sector and a decline in oil prices will contribute to a bleak picture for some ASEAN nations. This is because regional trade accounts in the past year in the Southeast Asian region have been driven by electronics exports and oil prices.
The full effect of lower exports and lower oil prices on Asia will vary according to the different economies. In Singapore, although a net import of oil added $3.4 billion (4% of GDP) in 2000, the effect was reversed by an increase in electronic exports. An anticipated electronics slowdown in 2001, HSBC economists predict, will hurt Singapore's trade account. However, other industries remain strong, such as chemicals, hence "overall export growth should remain positive". Inherent strengths in Singapore's economy such as a stable political environment also contribute to make Singapore less vulnerable to a global slowdown. HSBC economists expect the Singapore dollar to appreciate to S$1.7:US$1 by the end of this year.
Malaysia and Indonesia, on the other hand, can expect to be hit relatively hard. Electronics made up almost 65% of export growth for Malaysia last year. Oil exports constituted the other major driver of export earnings. Furthermore, despite huge trade surpluses, foreign exchange reserves have declined over the last six months, reflecting low foreign capital inflows. The economists expect that the ringgit peg may come under pressure if exports and foreign exchange reserves contribute to its downturn.
For Indonesia, nearly 50% of the increase in the trade surplus of $4.2 billion came from net oil exports last year. The other major contributors to export growth were electrical equipment and other industrial products. HSBC predicts that if international oil prices were to decline by 20% in 2001, the oil trade balance in Indonesia would shrink by about $1.5 billion. The outlook for a return of foreign capital amidst political and financial uncertainty is low, therefore, the economists expect the rupiah to depreciate to IDR10,000:US$1 by end-2001.
The Philippines and Thailand, on the other hand, are likely to benefit from lower oil prices. A 20% decline in oil prices will reduce oil imports by $700 million in 2001. Overall, HSBC expects the trade deficit to reduce from $5.3 billion to $4.9 billion. The outlook is rather dismal, given excess capacity in the manufacturing sector and high unemployment. They maintain that the peso will remain under pressure and trade close to P54:US$1 by the end of the year.
Thailand can expect to save close to $1.6 billion with the lower oil prices. The currency report predicts that the trade deficit will be lowered by $900 million in 2001. However, with non-performing loans remaining high at 37.8% of total loans, and the new government saddled with Thaksin corruption charges, HSBC economists predict that the baht will trade close to current levels of Bt43:US$1 by the end of this year.
