After surging in March and April, the U.S. dollar has been shedding value against a range of currencies in recent months. Countries with large manufacturing or commodity sectors that rely on exports may find this worrisome, as a stronger domestic currency tends to hurt exports. Many countries in Southeast Asia rely on exports to fuel growth to one degree or another, so they may be watching the dollar’s slide with particular apprehension. But the relationship between currency valuation and trade activity is not always as straightforward as it seems.
Take the Malaysian ringgit, which reached a high of 4.39 to the dollar on April 21 while last week it was trading very close to its pre-pandemic level of 4.11. That means for the past several months the ringgit has been steadily strengthening against the dollar, making exports settled in USD more expensive. Yet, after taking a big hit in April and May, exports surged to 97.12 billion ringgit in July, the second highest level ever recorded. How does an appreciating domestic currency lead to more exports? There are many factors, but one of them is that as the ringgit gained value against the dollar, the Malaysian government began pricing palm oil at a considerable discount to its Indonesian competitors. Exports of palm oil subsequently jumped 52 percent in July, compared to the year previously.
The Thai baht is also back to trading at about where it was in February, while exports of goods fell to $15.85 billion in May from a high of $20.9 billion in March. Thai exports have not bounced back as strongly as in Malaysia and the baht has now regained nearly all of its pre-pandemic value. With no return to mass overseas tourism on the horizon, Thailand may be hoping to lean on a weaker baht to boost exports as part of its economic recovery.
This is tricky however, since the baht seems to want to appreciate and the U.S. Treasury previously came close to putting the Thai government on a watchlist for currency manipulation. Vietnam is also in Treasury’s crosshairs for undervaluing its currency last year, and will likely come under scrutiny again given that its exports have remained very robust during the pandemic, perhaps benefiting from a currency that has remained remarkably stable in the midst of broader global volatility.
The Philippines has also seen its peso strengthen against the dollar: it is worth more now than it was at the beginning of the year, and the country has been running a trade deficit every month through the first two quarters. Yet that deficit has been narrowing despite the appreciating peso, and remittances from Philippine citizens living and working overseas fell only 4 percent, to $11.9 billion, in the first six months of 2020. This means that despite a strengthening currency and a consistent trade deficit, the country still has a comfortable surplus in its balance of payments.
There is one currency in the region that is bucking this trend. The Indonesian rupiah has not regained its pre-pandemic value and has been gradually shedding value against the dollar in recent months. The rupiah was worth 13,693 to the U.S. dollar on February 14, and last week was trading at 14,835. Given the scale of Bank Indonesia’s monetization of public debt currently underway, it seems probable the currency will continue to weaken over the coming months.
In fact, one of the reasons the Indonesian government may have felt comfortable pulling the trigger on debt monetization is because a weaker currency, as mentioned above, has certain advantages for economies in the region looking to kick start post-pandemic growth. Since the onset of COVID-19, Indonesia has seen its currency weaken and its surplus in tradable goods grow. The country’s current account deficit, once one of the bigger emerging market deficits, shrank to $2.9 billion in the second quarter of 2020.
The impact of COVID-19 on trade in Southeast Asia has been complex. Most currencies are gaining value against the dollar, but that doesn’t necessarily make their exports uncompetitive, as in the case of Malaysia. Meanwhile attempts to counteract the natural appreciation of the currency may attract the ire of the U.S. Treasury, demanding that the region’s central banks maintain a careful balancing act. Indonesia’s currency is the exception, gradually weakening against the dollar which has been a boon to its balance of trade. Even before the pandemic, the Jokowi administration was eager to reduce imports and boost exports in order to drive growth, so a weaker rupiah may be arriving at just the right time to be turned to the country’s advantage, especially as most neighboring currencies are gaining in value and potentially making regional competitors less attractive trade partners.
