The recent borrowing of ASEAN currencies against the US dollar has sparked the interest of investors and market analysts. While this rally may indicate economic strength, a deeper analysis suggests a more complex situation.
BCA research examines the factors driving this currency, including economic fundamentals, global trends, and country-specific conditions. Focus is on Malaysian ringgit, Thai baht, Philippine peso, and Indonesian rupiah.
ASEAN currencies have recently strengthened against the US dollar. However, BCA Research analysts believe that this appreciation is short-lived. They argue that underlying economic conditions, such as a decline in global exports and a shift to riskier investments, favor the US dollar and may lead to a slowdown in ASEAN currencies.
ASEAN currencies are strongly influenced by global economic conditions, particularly the production and trade cycle. A key factor is the decline in global manufacturing orders, which has historically reflected the decline in ASEAN currencies.
Although recent improvements in exports have provided some support, the global economy is expected to slow due to weak domestic demand in the United States.
This economic instability may lead to a period of risk aversion, where the US dollar appreciates and emerging market currencies, such as those in ASEAN, depreciate.
An examination of individual ASEAN currencies reveals varying degrees of vulnerability and resilience, influenced by both global and domestic factors.
The Malaysian ringgit has recently strengthened, but this rise is likely to be temporary. The country's trade surplus has decreased, and its current account surplus has also decreased.
As demand for US goods slows, Malaysia's trade and current account balance is expected to weaken further. This will put downward pressure on the ringgit, reversing its recent gains.
“Total FDI inflows, at USD 10 billion per year, have not increased at all in the last decade. Net FDI is zero. Net portfolio inflows have been very negative over the years,” said analysts at BCA Research.
Similarly, the recent rally in the Thai baht is expected to be short-lived. Thailand's trade balance has fallen on strike, and its current account balance remains positive.
The decline in export orders reflects a continued decline in the country's trade and current account balance, which may lead to a depreciation of the baht.
In addition, Thailand has faced persistent net outflows of FDI and portfolio funds for almost a decade, a trend that will not reverse in the near term, especially given the fragile state of the country's economy and ongoing political uncertainty.
Despite recent gains, the Philippine peso is expected to continue to depreciate. This is due to the country's increasing reliance on foreign debt to cover its trade deficit.
As the gap between Philippine and US Treasury bond yields narrows, it is 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 expected to weaken. Indonesia's current account remains in deficit, and both its manufacturing and exports are expected to remain sluggish.
This situation is exacerbated by Indonesia's reliance on imports from China, which is particularly vulnerable given China's rapid growth. The effect of the current account deficit will be a financial challenge, especially since Indonesia's capital account has returned to deficit, and the overall credit portfolio inflow will be negative.
Given the country's weak earnings growth and the limited attractiveness of other forms of capital inflows, the rupiah may face further depreciation.
BCA research warns investors against chasing the latest rally in ASEAN currencies. While the Malaysian ringgit and the Thai baht may outperform other emerging market currencies during a possible global market downturn due to strong financial positions, the Philippine peso and the Indonesian rupiah are expected to suffer due to their economies. weak and relying on borrowing.
BCA research suggests that investors maintain a short position in the peso and rupiah against the US dollar. They expect the ringgit and baht to outperform other emerging market currencies within the next six to nine months. However, the rupiah and peso are expected to continue to depreciate.
