Over the recent past, the global economy has experienced significant levels of volatility and uncertainty arising from a combination of inflationary pressures, supply chain disruptions, and uneven economic recovery patterns following major global events. However, among the most noticeable developments in recent weeks has been the heightened volatility observed in the foreign exchange markets, concerning the performance of several Asian currencies. In particular, currencies in emerging Asian oil-importing economies have experienced some of the steepest declines following the nearly 50% surge in Brent crude prices since the onset of the Iran conflict, despite intervention measures by central banks and governments to curb currency depreciation and stabilize financial markets. Nevertheless, other Asian currencies, such as the Singapore dollar and the Malaysian ringgit have displayed strong resilience, either remaining flat or appreciating in value against the US dollar.
Drivers of the deviations and what has been done so far
Interestingly, even though recent global events have been impactful, the extent of the volatility of each of these Asian currencies seems to be determined equally by domestic factors and policies in each country. For instance, the Indonesian Rupiah fell and reached a record low of 17,658 against the US Dollar this week, amid pre-existing pressure driven by growing investor concerns over Indonesia’s fiscal position and governance framework. The Indian rupee has emerged as the worst-performing currency in emerging Asia, declining by over 6% year-to-date, while foreign investors have withdrawn more than $20 billion from Indian equities since the onset of the war, with cumulative outflows already surpassing last year’s record levels. The Thai Baht has also underperformed year-to-date, declining by 2.72%, as energy price shocks and mounting fiscal concerns have further intensified downward pressure on the currency. These economies are especially vulnerable as oil-importing nations facing simultaneous capital outflows, with investors reallocating funds elsewhere, while shifting expectations of a hike in U.S. interest rates this year, have added further downward pressure. By contrast, bullish sentiments have strengthened towards the Singapore dollar and the Malaysian ringgit, reflecting the Singapore central bank’s safe-haven status and Malaysia’s role as a net energy exporter.
As currencies fall to record lows alongside mounting pressure to drive interest rates higher, Asian policymakers are taking measures to support their economies amid the global energy supply shock. Governments face a difficult policy dilemma, as efforts to preserve economic growth are complicated by weakening currencies that risk undermining confidence and fuelling inflation, while potential raises in interest rates to support currencies could further burden consumers and constrain economic growth amid the ongoing fuel shock. Indonesia announced a 50-basis-point interest rate increase to support the rupiah, while also taking control of commodity exports to ensure export proceeds remain onshore and are transacted in the local currency. India has urged citizens to reduce overseas travel and limit gold purchases in an effort to protect the rupee from further depreciation.The Philippines’ central bank has already implemented interest rate increases, while rising inflation has fuelled speculation that an unscheduled rate hike could occur ahead of the next policy meeting scheduled in a month’s time. However, pressure remains persistent, with several investment banks advising clients to sell weaker Asian currencies in favour of stronger regional counterparts.
What could this mean for the global economy and trade?
Due to the present uncertainty around the future of the scale of geopolitical tensions across the globe, it becomes challenging to capture the extent of the impact and the duration to which these currencies might continue to weaken. Nevertheless, it might be reasonable to expect tight regulations, to curb imports arriving into these Asian countries whose currencies are declining in value, while their governments may simultaneously implement various policies to further incentivise exporters and FDI inflows. For instance, Indian Prime Minster Modi has already visited various European states with the aim of boosting trade and investment flows, while Union Commerce Minister Piyush Goyal has outlined an ambitious plan of achieving $1 trillion in exports this year, while also advocating for stronger import substitution.
In addition, market pressures have been particularly severe in countries, such as Indonesia, which moved to centralise commodity export management, thus heightening fears among investors of greater state intervention in the market. S&P Global Ratings has warned that such policies could weaken export performance, reduce government revenues, and place additional pressure on the balance of payments position.
How will Sri Lanka be impacted from all this?
The Sri Lankan Rupee has also been equally unstable over the past week, after depreciating and then appreciating at a considerable pace. However, neighbouring countries too have been encountering similar movements, which implies the strong impact of the prevalent energy crisis and global uncertainty, which is essentially an external hit on these economies. Even though this makes it challenging to determine the impact in general on Sri Lanka’s external sector in the short term, the existing external buffers both in terms of the current account surplus in the Balance of Payment and the Net Foreign Assets of the banking system should help the country weather some of these shocks that comes it way.