Propping up peso is futile, says Moody's

Moody’s said yesterday that propping up the peso against the dollar would be an exercise in futility for the Bangko Sentral ng Pilipinas (BSP), adding that “losing billions” would otherwise be wasted “fighting an impossible battle.”

Moody’s said authorities in India, Indonesia, Malaysia, the Philippines, South Korea and Thailand have sold dollars in September to boost their ailing currencies.

But Moody’s said currency market intervention is likely to have little success, with many factors still pointing to weakening Asian currencies.

“With the exception of the yen, the outlook for Asian currencies remains bearish,” Moody’s pointed out.

According to the ratings agency, September saw a shift in thinking among monetary officials. Before, Moody’s said policymakers appeared content to watch their currencies slide, as they altered their focus from fighting inflation to fostering growth.

“But in the last few weeks, a number of central banks have taken action to prop up their currencies,” Moody’s said, adding that this had raised questions about whether the unsuccessful foreign exchange policy of the Bank of Korea would be replicated in other Asian nations.

Moody’s pointed out that the South Korean central bank spent at least $18.5 billion in foreign reserves since the beginning of the year, in an unsuccessful attempt to prop up the ailing won, which has fallen 18.1 percent over the same period.

Moody’s explained that South Korea’s large current account deficit, negative real interest rates, slowing growth and high energy prices have weighed heavily on the won.

“South Korea is heavily dependent on energy imports, and even the recent sharp drop in oil prices has failed to halt the weakening of the won,” Moody’s said. “With few signs of an imminent rebound in faltering domestic demand, the central bank is unlikely to have any success in stopping the expected depreciation of the won over the rest of the year.”

Moody’s noted that the Philippines and Indonesia were both experiencing severe inflation problems, with second round effects finally setting in and forcing monetary officials to continue tightening.

“Negative real interest rates and faltering stock markets have led to capital outflows from both nations, with the rupiah and peso having depreciated five percent and 2.4 percent, respectively, since July 1,” Moody’s said.

With most Asian currencies expected to depreciate further, Moody’s said the multibillion dollar question is how authorities will respond. The unsuccessful performance of the Bank of Korea in attempting to prop up the ailing won demonstrated the futility of currency market intervention.

“Hopefully other central banks in the region will not make the same mistake and lose billions fighting an impossible battle against markets, which hold the upper hand in these matters,” Moody’s said.