Current account surpluses fortify emerging market currencies in North Asia

SINGAPORE (Reuters) – Emerging markets in North Asia such as South Korea and Taiwan will lean on their strong current account surpluses to counter any ill effect of a U.S. interest rate hike on their currencies, in contrast to their more exposed peers in Southeast Asia.

Higher U.S. rates could divert capital from emerging Asia, weighing on the region’s currencies. To help counter that, a country would need trade surpluses, which would contribute to current account gains and currency strength as seen in the case of South Korea and Taiwan. Current account surpluses also deter currency speculators, which descended on economies reeling in deficits in the 1997-98 Asian financial crisis.

South Korea reported a current account surplus of $40.9 billion on a seasonally adjusted basis in the first four months of 2015, while Taiwan posted a $22 billion surplus in the first quarter and China had a surplus of $78.9 billion in the same period. In contrast, Indonesia had a $3.9 billion deficit. Malaysia reported a small $10 billion surplus, but its outlook is marred by low commodity prices seen undermining the value of the country’s exports.

Reflecting the surpluses, the currencies of emerging economies in North Asia have outpaced their Southeast Asian peers this year. The Taiwan dollar has gained 2.9 percent against the U.S. dollar. While the South Korean won has eased 0.5 percent and the Chinese yuan retreated 0.1 percent, the Indonesian rupiah has lost 7.0 percent, hitting a 17-year low this month. The Malaysian ringgit has fallen 6.9 percent, while the Thai baht has dropped 2.5 percent.

“The stronger external balances should provide Northeast Asian currencies with some comfort and buffer versus their Southeast Asian peers over the longer run,” said Lee Jin-yang, a macro analyst at Aberdeen Asset Management in Singapore. But some currency bears say South Korea, China and Taiwan are enjoying current account surpluses because imports are falling faster than exports, not because of surging outbound shipments. Still, Southeast Asia is comparatively worse off due to its dependence on commodities. South Korea and Taiwan at least export tech products that are more resilient than coal, copper and oil.


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