Currency watch urged

MOVEMENTS of Asian currencies must be closely monitored to ensure that a “competitive balance” is maintained in the region, an economist said.

With funds fleeing struggling markets and surging to emerging economies, currencies in the region have seen sharp appreciations, Asian Development Bank research fellow Victor C. Pontines yesterday noted.

Asian countries, he pointed out, have varying exchange rate regimes: Hong Kong and Brunei have a currency board while China and Vietnam use pegs. The Philippines, Korea and Japan let their currencies adjust independently while Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore and Thailand manage the float.

There has been “less willingness to tolerate exchange rate appreciation,” Mr. Pontines said, but not all countries in the region have room to devalue.

“As countries race to the bottom to devaluate their currencies, it creates costly beggar-thy-neighbor policies,” he explained.

This is difficult in an environment of “intense regional economic interdependence,” he said, as Asian countries rely on each other for trade and investment, especially with the United States and Europe still to recover.

“What is then needed is a regional framework for exchange rate policy coordination that will promote intraregional exchange rate stability,” Mr. Pontines said.

“However, there has been little attempt in seriously moving towards [that].”

An Asian Currency Unit index can show the movement of currencies, both against each other and against key external units, he claimed. The index can be used for surveillance purposes to assess which are over- and undervalued.

“Seeing the volatility of the currencies can let us manage the competitive balance of exchange rates in Asia, which is crucial to maintaining trade relationships,” he explained.

The Asian Currency Unit index can be used by bodies such as the ASEAN+3 (Association of Southeast Asian Nations plus China, Japan and Korea) Macroeconomic Research Office in its surveillance reports, Mr. Pontines said.

“The deviation indicator can serve as an early warning for monitoring financial crises; a persistent appreciation trend can reflect the surge in large capital flows, most especially short-term flows that are widely agreed to be highly destabilizing,” he noted.

It is also high time for Asia to consider exchange rate policy coordination, especially with ASEAN’s looming 2015 integration.

While there is no consensus yet, there are different means for coordination, the economist said, such as regional policy dialogue and surveillance, exchange rate cooperation or an economic and monetary union.

Full-blown integration may not be viable at this point, though, given the woes in the European Union.

“Nevertheless, [with] the combination of deepening economic integration and the highly contagious nature of shocks, the need to … coordinate exchange rate policies in the region should be considered a priority,” he said.

Asian currencies appreciated in varying degrees last year, according to the Bangko Sentral ng Pilipinas.

The South Korean won was the strongest, climbing by 7.78% against the US dollar. The Philippine peso was second, strengthening by 6.8%. It hit P41.05 per dollar on Dec. 28, 2012, the last trading day of the year, compared to the P43.84 at the close of the market on Dec. 29, 2011.

On the flipside, some Asian currencies weakened against the US dollar. The Indian rupee depreciated by 2.71% while the Indonesian rupiah fell 5.29%. The Japanese yen declined by 10%. –Diane Claire J. Jiao, Senior Reporter, Businessworld