Central banks intervene as Asia puts its strength to the test

• Asian central banks ramp up intervention amid EM sell-off
• Sell down rekindles painful memories of Asian financial crisis
• Analysts say this not a repeat of 97/98 but warn of more losses

A man pulls a hand-drawn cart in front of the Reserve Bank of India (RBI) building in Mumbai – REUTERS

JAKARTA/SINGAPORE (Reuters): Asian central banks have ramped up their intervention in currency markets to stem the sell-off roiling emerging markets, testing the notion that the region is better placed to handle a market rout than during its 1997-1998 financial crisis. This battle between central banks and investors selling emerging market assets will likely intensify as analysts warn the region’s currencies are set to slide further, pushed lower by falling commodity prices and the prospect of a US rate hike. “Lower oil prices, weaker commodity currencies, lower material and oil service costs and increased efficiency are all reinforcing to the downside,” wrote Goldman Sachs in a report. Bank Indonesia confirmed it sold dollars on Tuesday, with traders saying the Reserve Bank of India and Bank Negara Malaysia have been doing so as well in recent weeks. That comes as investors have dumped emerging market assets globally on tumbling oil prices and low growth prospects, with the Russian central bank’s sharp hike in interest rates on Tuesday spooking markets further. The Indonesian rupiah hit its lowest level since 1998 for the second day running and the Indian rupee dropped to a 13 month low on Tuesday. Bank Indonesia said it intervened in the currency markets to reduce volatility rather than defend the currency while the Indonesian finance minister also said it would buy back government bonds in the secondary market if necessary to stem capital outflows. The Reserve Bank of India has also sold dollars to ease the severity of the rupee’s fall, according to traders. “It is still not an alarming situation but we have to see how far the rupee drifts from current levels,” a Indian central bank official told Reuters, adding they would only intervene ‘strongly’ if there were large outflows. Bank Negara Malaysia declined to confirm intervention when asked by Reuters, while Bank of Thailand bank said there ‘was no need to act’ and no abnormal outflows despite Thai stocks slumping to their lowest levels since 2 June.   More falls ahead Analysts think further falls in currencies are likely when the expected rise in US interest rate materialises. “The weakness of Asian currencies comes at a time when the Fed hasn’t even increased interest rates yet,” said Khoon Goh, a currency strategist at ANZ bank in Singapore. The Federal Reserve holds its policy meeting this week, concluding Wednesday, and any signal that rates could rise soon could spark further emerging market selling. However despite the risks, analysts point to big differences between Asia now and in 1997/98. Most emerging Asian currencies now float freely whereas they used to have pegged exchange rates. Central banks also have deeper foreign reserve and swap lines with other central banks that give them access to more dollars. “Part of the reason we saw a crisis in 1997 was that back then currencies were overvalued and a lot of the countries were running large current-account deficits,” said ANZ’s Goh. “This time around the currencies are not overvalued.” Only Indonesia and India are running current account deficits while external debt is lower too. Within Southeast Asia today, Thailand is the most exposed with foreign liabilities equal to 39% of GDP, still well below the 60% seen in 1996. However there are risks beyond headline numbers. Indonesia’s external debt is a modest 34.7% of GDP yet its shallow capital markets mean that it borrows about 38% of its local debt from foreigners, according to the finance ministry, highlighting the risk from a sovereign perspective.