Introduction to ASEAN Currency
The Indonesian rupiah and Philippine peso, Southeast Asia’s biggest underperformers in recent years, have scope to outperform in 2019. These currencies have two things going for them: market positioning is more in their favor and key downside risks are abating.
Factors Affecting the Rupiah
Current Account Deficit
In Indonesia, the current account deficit is poised to narrow and elections are effectively in the rear view mirror. The trade balance swung into surplus in February and March as a slew of government measures to narrow the shortfall finally started to bear fruit.
Interest Rates
As the rupiah came under heightened pressure in 2018, Bank Indonesia responded with aggressive rate hikes. The central bank raised rates by 175 bps between May and November 2018. This is not quite as much as the Fed’s 225 bps of hikes since December 2015 or its own cumulative cuts of 200 bps in 2016 and 2017.
Economic Growth
The apparent re-election of President Joko Widodo will avoid the uncertainty of a leadership transition. Jokowi, as the president is known, has a strong track record of accomplishments which should finally start to move the dial on growth during his second five-year term. If global risk appetite recovers sufficiently to ensure rupiah stability in 2H, Bank Indonesia may start to lower interest rates.
Factors Affecting the Peso
Inflation
A perception that the Philippine central bank was too relaxed about second-order price pressures put added weight on the Philippine peso in 2018. But the tide started to turn with the central bank’s shift to a more proactive monetary policy stance and subsequent return of inflation to the target range.
Interest Rates
Bangko Sentral ng Pilipinas aggressively raised interest rates by 175 bps in 2018. And, since the peak at 6.7% in September and October, inflation has progressively slowed. Inflation returned to the 2-4% target range in February and March, as beneficial base effects offset the impact of higher oil prices.
Global Factors
Global Demand for US Dollars
A remaining headwind for these high yielders on an outright basis is that global demand for U.S. dollars remains strong. This is despite the Federal Reserve becoming more sensitive to market sentiment and China’s stimulus starting to bear fruit.
Global Growth and Risk Appetite
Global growth and risk appetite should be on a sounder footing in 2H 2019, unless the U.S. widens its tariff net. That’s when favorable base effects from the U.S.-China trade war kick in.
Conclusion
In conclusion, the Indonesian rupiah and Philippine peso have the potential to outperform in 2019 due to favorable market positioning and abating downside risks. However, global factors such as demand for US dollars and global growth and risk appetite will also play a significant role in determining their performance.
