as America raises rates at high speed to deal with inflation whereas China’s economy slows, Asian currencies may face further downside pressure. It may also prompt their governments to make some tough choices.
federal Reserve increased interest rates by 0.75 percentage points on Thursday, biggest increase in almost three decades. Monetary tightening in the US has already fueled a strong rally in the greenback this year – the WSJ dollar index rose nearly 9% in 2022 to its highest level since 2002.
On the other hand, two of Asia’s major economies—China and Japan—are bucking a tighter trend due to domestic inflationary pressures. remains relatively short, The Japanese yen is down 14% against the dollar this year, while the Chinese yuan is down about 5%.
The combined evasion of both of them could push other Asian currencies down as well. For example, the Korean won has fallen about 8% against the dollar this year. Weakness in external demand will take a toll on export-driven economies, especially in East Asia.
As developed economies reopen, spending has shifted from goods back to services, Slowdown in consumption related to lockdown The demand for some goods in China has also reduced.
Cheaper currencies should theoretically make exports cheaper. But the fact that many exports, even those not destined for the US, are invoiced in dollars can, in fact, dilute trade volume, according to
The bank said that nearly three-quarters of trade in the Asia-Pacific region is invoiced in dollars, which is much higher than the Asian countries’ actual trade with the US, which means prices may remain stable and take some time to adjust. It may take time.
And weaker currencies will translate quickly into higher effective prices, especially for imported goods—energy and food. that raises domestic inflation, It is also hurting the manufacturing.
Compared to the Asian financial crisis of the late 1990s, many countries in the region have shunned foreign-reserve cash and reduced their reliance on foreign currency loans. So a similar external debt crisis is unlikely.
Federal Reserve Chairman Jerome Powell said the central bank’s goal is to reduce inflation to 2%. The Fed on Wednesday approved a 0.75-percentage-point rate hike, the biggest interest rate hike since 1994. Photo: Elizabeth Frantz/Reuters
But higher rates can still wreak havoc on local economies, which have built up debt, both publicly and privately. For example, according to the Bank for International Settlements, the debt servicing ratio for the private non-financial sector in South Korea stood at 21% at the end of last year and 14.5% for Thailand.
Years of low rates also allowed governments to borrow more without high interest bills. According to Gavekal, Asian economies, excluding China, have increased their debt-to-GDP ratios by 15 percent over the past decade. The research house says Asian central banks will need to increase interest rates by 3 percentage points to bring real policy rates back to their 10-year averages.
Monetary tightness and shrinking external demand are an ugly combination for export-dependent East Asia. The result may not be a widespread debt crisis, but a painful recession is likely – and private sector borrowers in places like South Korea, who took full advantage of low-interest days, could soon be in trouble with their creditors as well.
write to Jackie Wong jacky.wong@wsj.com
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