Businessworld: Southeast Asia currencies may be next big bet

Southeast Asia currencies may be next big bet

SINGAPORE -- Thailand, Indonesia and the Philippines could see their currencies outperform those of richer Asian neighbors in the coming months as foreign investors fuel a stock market boom on signs of a sustained economic upswing.

The three economies fell off the radar screens of global investors after the 1997 Asian financial crisis. The rise of China and India since the turn of the millennium pushed Southeast Asia further into the shadows.

Not any longer. Leading stock market indices in all three countries have almost doubled in the past two years, even as their currencies weakened or underperformed those of their powerful neighbors South Korea, Taiwan, Singapore and Japan.

Analysts now say it's time for the Southeast Asian currencies to play catch up with, or even outrun, their northern rivals to reflect an improvement in their economies and the confidence investors have shown in the region's companies.

"Our indicators are pointing to an outperformance of the Southeast Asian currencies in the coming months and a stalling of the (north Asian) currencies," said Philip Wee, strategist at Singapore's DBS Bank, Southeast Asia's largest lender.

"Although the dollar looks weak, it's difficult to squeeze out more from north Asian currencies. So the path of least resistance is Southeast Asia. Do the policy makers mind? No!"

The central banks have largely stayed out of the currency markets in the past few months even as their counterparts in South Korea, Taiwan, Singapore and India accumulated tens of billions of dollars -- brought in by foreign investors and local exporters -- to curtail strong gains in their exchange rates.

Some analysts say this intervention could well continue as demand for North Asia's electronics exports slows. That would make currencies of economies boasting resurgent domestic demand -- such as Thailand or Indonesia -- relatively more attractive.

Thailand expects its economy to grow between 5.5% and 6.5% this year. Indonesia is hoping for growth of more than 6%. The Philippine economy, which expanded at its fastest pace in 15 years in 2004, may grow 6.3% this year.

With that kind of growth, Claudio Piron, a currency strategist at JP Morgan Chase, expects the baht to outperform all other Asian currencies, except the Taiwan dollar, in 2005.

"The expected resilience of the baht is explained by two key drivers: an upturn in the domestic investment cycle and continued global growth."

He predicts the baht, already at a 4-1/2-year high, will firm almost 5% to 36.8 per dollar by the end of the year despite losses suffered by Thailand's tourism industry from the Dec. 26 tsunami.

The tsunami wreaked most devastation on Indonesia. In its aftermath, Indonesia attracted billions of dollars in foreign aid and was granted more time to repay government-to-government debt.

The inflows, coupled with the new government's stepped-up efforts to lure back foreign direct investors, are helping to show the rupiah in a new light.

"I particularly like Indonesia; their banks have started lending again," said Wee at DBS Bank.

Doubtless, Southeast Asian nations are far from solving their deep-rooted problems -- widespread poverty, lack of pricing power overseas because of their reliance on low-value-added exports, endemic corruption and bottlenecks to investment.

"I'm long on the baht but I'm not a structural bull for rupiah or the peso," said Bhanu Baweja, a strategist at UBS.

While Baweja agrees that the rupiah and the peso are both undervalued, he does not expect them to outperform because foreign investments are not strong enough. The currencies could get hurt once the United States raises interest rates, he said.

In the case of the Philippines, the government's inability to speed up fiscal reforms led Standard & Poor's this month to cut the country's long-term debt rating by one notch. Yet the government beat its budget deficit target for 2004 and expects to cut the shortfall further this year.

The peso, the best-performing Asian currency so far in 2005, may benefit further from pledges by Chinese firms to invest $1.6 billion in the country's mining industries and from a $1 billion bond that the government plans to price on Wednesday, said Irene Cheung, head of Asian currency strategy at ABN AMRO Bank.

She said stock investors had noted the new optimism about Southeast Asia and it was time currencies reflected that change.

Indonesia's key stock index powered ahead this month to record highs, the Philippine index raced to a five-year high and the Thai stock market benchmark rose to a nine-month high.

"The baht and the peso, two of our favorite currencies, continue to benefit from equity inflows," said Cheung. -- Reuters

The Prudent Investor Says…

I have been writing about this ‘regional currency impetus’ since the last semester of last year. Today, the unfolding developments in favor of the domestic currency are being carried by the mainstream media, which should provide for a psychological boost and reaffirm the emerging trend. And as I have written before, expect capital flows to the domestic economy to accelerate as the trend becomes entrenched.