BANGKOK, Oct. 16 (Bloomberg): Policymakers across Southeast Asia are turning to the conventional and unconventional instruments available in their toolbox to stem falling currencies and cool price gains.
While the region’s problems are middling compared to some neighbors to the south, the countries face the greatest challenges in decades. The Philippine peso fell to a record low this week, while the Malaysian ringgit slipped to the weakest level in almost 25 years, as a stronger dollar increases the risk of imported inflation.
Even Singapore, the only developed economy in the group, is not immune to the risks emanating from a gloomy global outlook.
From monetary tightening to depleting foreign exchange reserves to using open-mouth trading to steer market expectations, the region’s central bankers are leaving no tool untouched to restore stability. Some are even allowing bond yields to rise to stem capital outflows.
Relying on a combination of tools for policymakers in the region “has worked well for them so far,” said Priyanka Kishore, an economist at Oxford Economics. “However, it is becoming increasingly difficult for central banks to maintain this balance.”
Here’s a closer look at the tools Southeast Asian policymakers have put in place so far:
Policy adjustment
Singapore, which uses the exchange rate as its main monetary tool, delivered its fifth adjustment since October 2021 on Friday, a deadline that also makes it the first in the region to start normalizing policy settings. When it comes to rate adjustments, Malaysia was the first to raise its benchmark this year, although the Philippines raised borrowing costs the most, rising 225 basis points so far.
Philippine central bank Governor Felipe Medalla on Friday signaled the need for an increase of up to 75 basis points next month, after US core inflation data.
Even the State Bank of Vietnam, the latest to leave the bloc in Southeast Asia, rose 1 percentage point, following Prime Minister Pham Minh Chinh’s calls for measures to support the currency. More card hikes are possible in the region, with Thailand and Malaysia also set to review rates in November.
drop in reserves
The ample foreign exchange reserves accumulated during the year of the pandemic are acting as buffers, with central banks dipping into their piles to stabilize their currencies. Malaysia, Indonesia and the Philippines have depleted their reserves to levels last seen in 2020, while Thailand’s fell to a five-year low, the latest data shows.
While the drop is partly due to asset appreciation, a strong dollar also puts pressure on policymakers to tap into reserves to stop their currencies from falling. Philippine Medal has said that the authority is “very active” in the foreign exchange market.
The decline in reserves may reduce the space for more active monetary intervention and stabilization, said Chua Hak Bin, an economist at Maybank Investment Banking Group. Still, “intervention can only help stabilize and reduce currency volatility, but it probably won’t stop the depreciating trend.”
moral suasion
Communication has become a key tool for central banks to convey their monetary policy signals to markets that have become increasingly volatile. Thailand is using social media to shed light on its rate decisions, while Indonesia regularly flags when it is intervening to prop up the rupee.
The Philippines has also combined its currency interventions with a call for investors to refrain from “taking unfair advantage” of market conditions, as well as warnings that it may tighten documentary requirements for operations. Lenders have responded by saying they would work with the central bank. bank to nullify speculation.
Reserve ratio
Indonesia has nearly tripled lenders’ reserve requirement ratio, taking it to a record 9% in September from just 3.5% in early 2022. It is expected to soak up 375 trillion rupees ($24.4 billion ) in liquidity this year, after embarking on one of the largest quantitative easing programs among emerging markets during the pandemic.
The Philippines also delayed its plan to cut its RRR before the end of the year in line with a broader goal of lowering it to single digits by mid-2023, saying a cut could confuse the market at a time it seeks to soak up liquidity.
bond yields
“Operation Twist” is Indonesia’s latest tool to support the rupiah, selling short-term government bonds and allowing yields to rise to attract foreign funds. Annual bond yields are at their highest level since 2020.
Some central banks are keeping an eye on economic growth even as they tighten monetary policy. On the flip side of its Operation Twist, Indonesia is buying long-term debt paper to lower interest rates for the government. The same push is being seen in Vietnam, where policymakers are using open market operations to keep borrowing costs low while raising the policy rate. -Bloomberg
