Riding the greenback uptrend

The US dollar continues to strengthen, benefiting some Asian exporting economies and putting pressure on those with high US dollar debt, although these are still largely manageable

A teller counts U.S. dollars at a money changer in Jakarta, Indonesia on May 18, 2015.
A teller counts U.S. dollars at a money changer in Jakarta, Indonesia on May 18, 2015. PHOTO: REUTERS

The greenback is rising at the fastest clip in decades against most currencies worldwide, which should be cause for cheer for export-oriented countries such as Singapore and many others in Asia.

But Singapore's economy isn't enjoying as much of the benefits as it should.

The latest from economists is that they expect the economy to expand 2.8 per cent this year - lower than their earlier projections - although it is still within the Government's estimate of 2 per cent to 4 per cent gross domestic product (GDP) growth.

Weaker manufacturing and exports and a stagnant property market are all putting the brakes on Singapore's economy.

Reflecting this weakness, the Singapore dollar, widely regarded as the region's safe-haven currency, has slid 3.7 per cent against the greenback so far this year - in the third-worst performance among 11 regional peers.

The Singdollar was trading at $1.3768 against the US dollar yesterday afternoon after clawing back from its year-low of $1.3929 on March 18 - its weakest since May 25, 2010, when it hit $1.4185.

Its decline, along with most Asian currencies against the greenback, looks set to continue as investors' appetite for the US dollar remains strong. Despite the United States Federal Reserve's dovish note in last week's meeting, the US still looks set to be first to raise interest rates.

Winners and losers

BUT there are winners and losers in a strong greenback scenario.

Those exporting to the US are in a sweet spot, as they are already benefiting from the growth momentum there and their depreciating home currencies make their products and services more competitive.

A case in point: Despite overall downbeat export numbers for February, Singapore's non-oil domestic shipments to the US - one of the Republic's largest trading partners - surged 7.5 per cent last month over the same period a year ago. Compare that with a 3.9 per cent increase in January.

The International Monetary Fund projects that emerging economies worldwide will grow 4.3 per cent this year, compared with 2.4 per cent for advanced economies.

But it's a different story for those who are importing goods or raw materials in US-dollar terms and are making sales in home-currency terms. Those will likely be worst hit, Barclays economist Leong Wai Ho said.

"Because most of the world's trade is priced in US dollars, if the strong dollar is a sustained trend, this may force businesses to try to renegotiate payment terms with suppliers," he said.

"For instance, if you are buying from China, you may ask to redenominate payment in the yuan or currencies other than the US dollar."

A depreciating Singapore dollar versus the greenback has other downsides, too. It could hasten consolidation in the construction sector, which is already slowing down, for example.

Mr Leong said: "If the construction companies' purchase contracts are in US dollars and their earnings are in Singapore dollars, they will likely suffer."

Sometimes, a rising dollar isn't always a boon for a country's export competitiveness.

For one thing, the greenback is rising against most currencies as well and competition among countries is as fierce as ever, so profits may not be improving as much as one may expect, HSBC economist Frederic Neumann said.

As the US dollar's strength is a reflection of policy divergence among the world's biggest central banks, rather than of robust US growth, shipment volumes may not improve much either.

Divergent monetary policy actions are taking place worldwide.

The Fed is trying to normalise policy by raising interest rates, while the European Central Bank is embarking on a massive quantitative easing effort. Japan is continuing its stimulus programme.

Mr Leong said: "We were more export-oriented in the early years. But our share of GDP growth through exports has dropped as our service sector, property, retail, financial, healthcare, IR (integrated resorts) and associated entertainment services grew in recent years."

Corporate debt

AND here's the rub. The low interest rate environment in the past decade has spurred a rise in dollar debt in emerging markets, which find it cheaper to take loans in US dollars, sparking concern over what this means for their balance sheets.

Offshore lending in US dollars has soared to US$9 trillion (S$12.4 trillion) and poses a growing risk to both emerging markets and the world's financial stability, the Bank for International Settlements (BIS) has warned.

Emerging markets - a big chunk of whom are Asian corporate borrowers - account for about half of these debts.

The fear is that as the US dollar gains in strength, the interest burden on these companies will escalate as their income streams are in local currencies.

Among these Asian firms, one area of concern is Chinese firms, whose debts have jumped fivefold to US$1.1 trillion since 2008, according to BIS data.

Government debt

THE strengthening US dollar has created external pressures in some countries, as reflected in weakened currencies and declining foreign exchange reserves, noted Moody's Investors Service.

For countries like Malaysia, falling commodity prices are weighing on export revenues, reducing current account surpluses or increasing deficits.

The central bank in Malaysia has used its reserves to try to stop even larger depreciations, Moody's said.

While Asia is seeing signs of a slowdown, the region doesn't look too vulnerable, given that eight out of 13 countries are in a net creditor position, which means the value of their external assets that are now in a stronger currency exceed that of their borrowings.

And although they have debt obligations in US dollars, these are still manageable.

That's also because their weaker home currencies also help boost competitiveness and narrow current account deficits, Capital Economics chief emerging markets economist Neil Shearing noted.

For example, foreign exchange reserves in India and Indonesia have risen and their nominal effective exchange rates have not depreciated as significantly as elsewhere.

Both countries' current account balances have improved since 2013 and capital flows have accelerated in anticipation of policy reforms following political transitions last year, Moody's said.

In addition, the drop against the dollar has been modest.

In China, Thailand, the Philippines and India, currencies have weakened by less than 5 per cent, Mr Shearing said.

Unlike in 1997, Asian exchange rates are generally not pegged to the dollar anymore, economist Glenn Maguire of the Australia and New Zealand Banking Group in Singapore pointed out.

The region in general, with the exception of India and Indonesia, has moved to and remained in current account surplus and has stockpiled substantial reserves.

Banking sectors are stronger and central banks are far more transparent than before.

Mr Callum Henderson, head of forex research at Standard Chartered Bank, agreed.

"Asia is much better prepared for a stronger dollar than it was in 1997. Then, (exchange rates) were mostly pegged and external balances across the region were in much worse shape," he said.

"The concern this time around is corporate forex debt in some specific countries, but overall, the region is in better shape."

Looking ahead, where are the Singdollar and the greenback headed?

It is likely that the Singdollar will continue to weaken vis-a-vis the US dollar.

A softening economy, weak inflation and lacklustre domestic demand could lend weight to a further easing of Singapore's monetary policy, come the Monetary Authority of Singapore's (MAS) policy meeting next month.

"Further weakening of currency policy should be in the pipeline," said sovereign strategist Anthony Chan of AllianceBernstein.

"The Singapore dollar has not really been attractive in the current cycle, especially on expectations that the MAS would prefer to weaken the currency to support growth."

Others say further easing next month will send a signal that the era of Singapore dollar strength is coming to an end.

Barclays' Mr Leong said: "That may be a disincentive for people to invest."

Structural improvements

WHILE a repeat of the 1997 Asian financial crisis doesn't appear likely, Asia should stay focused on investments that raise productivity and competitiveness so they can be less dependent on credit and foreign capital in the long run.

Mr Leong said: "It's more critical than ever to ensure Singaporeans can adapt to changes in the global economy, and become more knowledge-intensive, and able to adapt to new trends and technologies starting at a very early age."

After all, true competitiveness doesn't come from nominal currency adjustments, but from having efficient labour and capital markets and logistics and distribution networks.