Uncertain US trade policy, emerging market sentiment, and continued strength in the dollar (USD), have emerging Asian currencies all shook up.
This week alone, the Indonesian rupiah hit a two-decade low against the greenback, while the Indian rupee fell to 71.78 versus the USD.
Amid the market mayhem, Nomura’s research analysts have identified two Asian currencies that are at high risk of exchange rate crises: Sri Lanka and Pakistan.
Nomura’s Damocles index, which measures eight indicators across 30 countries, said that the Sri Lankan rupee was at the greatest risk of a crisis, despite the country having turned to the International Monetary Fund (IMF) for assistance in 2016.
Key reasons include the country’s still-weak fiscal finances, a very fragile external position and political instability.
Sri Lanka has foreign exchange (FX) reserves of less than five months of import cover and high short-term external debt of $7.5 billion, thus facing large refinancing needs.
On the political front, thousands of opposition protesters are asking the government to step down, while multiple ministers have resigned from their posts this year, thus weakening the current administration.
Damocles’ sword also hangs perilously close over Pakistan, cautioned the report’s authors, led by chief economist Rob Subbaraman.
The South Asian economy, which recently saw a change in prime minister, is suffering from severe balance-of-payments stress as FX reserves have shrivelled to barely two months of import cover.
Pakistan also faces a twin-deficit problem, with current account and fiscal deficit both running at over 5% of gross domestic product (GDP).
This runs alongside a huge debt-to-GDP ratio of over 70%, fuelled by Pakistan’s active involvement in China’s Belt and Road initiative.
The authors said that one of the Imran Khan-led government’s first decisions will be to choose between further IMF intervention - of up to $12 billion - or to borrow more from China.
‘High oil prices, sticky imports and lacklustre export growth add to the risks,’ they stated.
Meanwhile, John Woods, Asia-Pacific chief investment officer of Credit Suisse, continues to be negative on the Philippine peso.
‘We would prefer to wait for more clarity on the ruling of higher revenue allotment to local government units as it will negatively affect fiscal balance,’ he wrote in the bank’s latest monthly investment newsletter.
The deceleration of the Philippine economy to 6% in the second quarter of the year, coupled with high inflation projections of 4.9% for 2018, are also dampening investor sentiment.
However, Woods is maintaining a neutral stance on the currency at the centre of it all: the Chinese yuan (CNY).
He expects the CNY to stabilise in the fourth quarter of 2018 once China’s growth improves, following policy easing by the People's Bank of China.
Consequently, Credit Suisse has revised its USD/CNY forecasts to 6.80 for three months and 6.60 over 12 months to reflect increased trade risks.