Southeast Asian Currencies End the Year on a High Note

2022 was a difficult year for currency markets, as the Federal Reserve began raising its benchmark interest rate to curb inflation in the United States. When the Federal Reserve does this, other currencies tend to lose value against the dollar, and in previous cycles, emerging markets, particularly those with current account deficits, have been hit the hardest.

Central banks have two main policy instruments to combat such a rapid depreciation of the currency. They can raise their own interest rates, or they can use accumulated foreign currency reserves to prop up the currency and assure global investors that its value will not collapse. Most use a mixture of the two.

Many of the major currencies of Southeast Asia was under pressure this year as the Fed tightened, peaking around October and November 2022. Yet almost all of them are ending the year considerably stronger against the dollar. With the Fed indicating that it will ease aggressive rate hikes in 2023, regional currencies may have weathered the worst of the storm and are likely to see greater stability in the new year.

The Indonesian rupiah started the year relatively strong, but has steadily depreciated in recent months. Bank Indonesia kept its benchmark rate at 3.5 percent until August, when up 25 basis points, and continued to rise until reaching 4.75 percent in October, where it has remained. On the currency side, the central bank had $134 billion in reserves. in his books as of November 30, $4 billion more than it had at the end of October. This means that despite year-end volatility, the rupee is on a reasonably strong footing going into 2023, especially if the Fed cools down on its rate hikes as expected.

malaysia has raised his policy rate four times since May, taking it to 2.75 percent in November 2022. They have not risen since, and the ringgit has steadily gained value against the dollar to close out the year. As of now, the exchange rate hovers around 4.4 ringgit to the dollar, meaning the currency has depreciated 6 percent since the beginning of the year. Just a few months earlier, in November, it was down by around 15 percent. Meanwhile, foreign exchange reserves have declined by just 5.7 percent since December 31, 2021.

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Thailand, for which currency stability is particularly important given its export-oriented economy, has seen the baht soar this year. It hit 38.3 to the dollar in October, a 15 percent drop from the start of the year. But the central bank moved aggressively to stop this depreciation, with foreign exchange reserves falling from $194 billion in early September to $179 billion in mid-October when the currency was under the most intense pressure.

After this intervention, the baht began to strengthen and will end the year down only about 4.5 percent against the dollar. This use of significant foreign reserves to control the depreciation of the baht has allowed the central bank to refrain from making large interest rate hikes. The policy rate it currently stands at 1.25 percent, among the lowest in the region. This is important given the large number of Thai consumer over-indebtedness and sensitivity to interest rate rises.

Of all the central banks of the major economies in Southeast Asia, the Philippines is the one that has risen most aggressively. In May they raised the reference rate from 2 percent to 2.25 percent, and then continued raising it due to the current account deficit and pressure on the exchange rate. The most recent increase entered into force on December 16, raising the rate to one of the highest levels in the region at 5.5 percent. But it seems to be working.

The Philippine currency, which was trading at 59 pesos to the dollar in October, is currently hovering around 55 (in this case, a lower number means the peso has strengthened against the dollar). However, while this has eased some of the pressure on the currency, the central bank and the new administration of President Ferdinand Marcos Jr. will be vigilant about the knock-on effect that higher interest rates could have on economic growth and debt. . In the new year.

On balance, the region’s currencies have held up quite well in the face of harsh global monetary headwinds. There may be a global recession in 2023, but growth prospects in Southeast Asia look promising. With more stable currencies across the region, it could be a bright spot in the international economy.

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