Singapore: India, South Korea and Vietnam will fail to halt declines in their currencies by using intervention because their economies are slowing and trade deficits widening, said Morgan Stanley, the second biggest US securities firm.
The three central banks have “repeatedly” been buying and selling currencies, said Morgan Stanley, as the Indian rupee won and the Vietnamese dong slipped at least 5% in 2008, threatening to accelerate inflation by increasing import costs. Korea, the world’s sixth biggest holder of foreign exchange reserves, pledged on Monday “stern action” to stabilize the won.
“Their intervention will ultimately fail,” wrote Stewart Newnham, a Hong Kong-based research analyst at Morgan Stanley. “The best they can hope for, in our view, is to engineer an orderly decline through a ‘smoothing operation’. And maybe Vietnam cannot even achieve that.”
The South Korean won has dropped 10.5% this year, Asia’s second biggest loser after the Thai baht, to 1,041.75 against the dollar according to Seoul Money Brokerage Services Ltd. India’s rupee has lost 8.7% to 43.1 per dollar and the dong has slipped 5% to 16,847 per dollar. “By far the strongest pressure is on the Vietnamese dong” due to its limited foreign exchange reserves, wrote Newnham. Morgan Stanley forecasts Vietnam’s reserves at $27 billion, compared with India’s $302 billion, the world’s fourth biggest, and South Korea’s $258 billion.
Losing out: A file photo of pedestrians in front of South Korea’s central bank, the Bank of Korea, in Seoul. The South Korean won, Asia’s second biggest loser, has dropped 10.5% this year against the dollar.
Newnham forecasts Vietnam will be forced to “realign” the dong. Traders are pricing in an 18% fall in the coming year to 20,500, according to offshore 12-month non-deliverable forwards.
Accelerating inflation has pushed the “real rates,” which are interest rates accounted for inflation, towards zero or negative levels because “interest rate stances are not sufficiently tight,” wrote Newnham. He confirmed the report by telephone.
Korea’s benchmark rate is at 5% and Vietnam’s at 14%, compared with inflation of 5.5% and 26.8%, respectively. India’s policy rate is at 8.5%, compared with its wholesale price index at 11.63%. “Their interest rate and exchange rate policies are not internally consistent for currency intervention to be regarded as credible,” Newnham said in his note.
Banks in the three countries are “showing signs of discomfort and this could feed through into foreign exchange weakness,” Newnham wrote, citing high loan-to-deposit ratios, a shortage of dollars onshore and property loans.