Devaluation part of cycle of ups and downs, but worries persist for long-term impacts

FISCAL CONSOLIDATION IS NEEDED TO AVOID THE RISK OF MORE PERSISTENT EXCHANGE RATE DEPRECIATION. "

THE riel’s recent slide to record lows may not have reached the proportions of the euro, but some analysts in the domestic banking sector say there is reason to believe the fall in the value of Cambodia’s currency may be among the first local effects of the Greek debt crisis.

As the euro crashed 10 percent against the greenback in the past month, the dollar has gained significant ground against almost every major currency as investors revert to safe assets in the face of another potential financial mess.

Since April 20, the riel has lost 1.1 percent of its value down to 4,214 riels to the dollar Thursday, according to the official average rate published by the National Bank of Cambodia (NBC).

“We have been watching every day. Now it’s because the dollar is appreciating against other currencies,” NBC Director General Tal Nay Im told the Post Wednesday.

Still, the riel has fared worse than most in the region, with even the Thai baht outperforming the Cambodian currency – losing just 0.4 percent of its value in the past month despite Bangkok’s violent protests.

The Singapore dollar has fallen roughly parallel with the riel at more than 1 percent over the same period.

Neighbouring Malaysia has been the best performer in Southeast Asia, with the ringgit losing just 0.06 percent against an increasingly strong dollar.

FOREX IN VIETNAM

Strict currency controls have weakened dong

Efforts to reduce dollarisation in Vietnam have emphasised strict forex constraints designed to guarantee use of the local currency, which ultimately have only served to sap confidence from the dong. The Vietnamese currency was down 5.4 percent last year against the US dollar – in part due to the economic crisis – and looks to be facing a similar slide this year, say forecasters, despite the efforts of Hanoi. “Dong demand dropped as exports fell [during the crisis],” noted Acleda’s Vice President John Brinsden this week. The riel, by contrast, escaped the negative effects of last year’s 18 percent fall in exports, as trade is in dollars. But in Vietnam strict foreign exchange controls, which promote use of the dong, meant demand for the local currency fell as Vietnamese exports declined. On Thursday, Nguyen Duy Hung, chairman of Saigon Securities Joint-Stock Co, said that Vietnam may weaken its currency further to rein in the nation’s trade deficit, Bloomberg reported. The company’s Sector Watch report predicted a further 3 percent to 4 percent depreciation for the rest of 2010. Policy makers have reduced the dong’s value twice in the past six months, narrowing the gap between the official rate and that in the black market from as much as 12 percent. Central Bank Deputy Governor Nguyen Van Binh said the currency will be managed “in a flexible manner based on supply and demand”.

STEVE FINCH

Although the Vietnamese dong’s official rate is down just 0.1 percent in the past month, unofficial money changers have undermined efforts to prop up the beleaguered currency.

This practice led the State Bank of Vietnam to issue a statement on May 14 denying a further 4 percent devaluation.

Seasonal factors may also be at play in the depreciation of the riel. International Monetary Fund (IMF) data show the currency traditionally hits a trough around the middle of the year and peaks in December and January, as increased tourism adds national dollar supply and the harvest leads to a rise in riel transactions.

Last year, the average riel rate in May was down close to 0.7 percent on April, the fourth year in a row the local currency fell against the dollar during the period.

That suggests the current trend can partly be seen as par for the course, ACLEDA Bank Vice President John Brinsden said Wednesday: “I see no signs at all of this being a concern.”

In the past two years, the riel has bottomed out in July, falling to 4,187 to the greenback last year.

“If in three months we see the same thing, then maybe we will have a problem,” said Brinsden, who suggested the strong dollar, due to the Greek crisis, was the likely cause of the recent decline.

IMF Cambodia representative John Nelmes said the knock-on effect of the global economic crisis is also a possible cause.

The fallout prompted most governments – including Cambodia’s – to raise the budget deficit to spur economic recovery. Nelmes estimates that Cambodia’s deficit roughly doubled last year to 5.5 percent, still much lower than the likes of Greece and the United Kingdom, among other

countries.

“Fiscal easing injects riel into the economy, and when the supply of riel increases relative to demand, its price falls. This is the depreciation,” he said by email Thursday.

The Cambodian currency has therefore faced a number of downside factors outside of the control of the central bank, a situation made more acute by the high level of dollarisation in the Kingdom – only about 10 percent of money supply is made up by the riel.

The only feasible direct intervention by the NBC remains creating artificial demand through state purchase of the riel, as performed last year, in a bid to keep the currency around the preferred 4,100 riels range to the dollar, say analysts.

Bankers in Phnom Penh note, however, that there remains no sign of further intervention in the short term, as the central bank plays a waiting game amid the current uncertainty.

“We will see if the riel continues to depreciate; [then] we will intervene,” said NBC Director General Tal Nay Im Wednesday, a policy Nelmes said was “appropriate”.

Much of the riel’s near-term fortune will likely be determined by the strength of the US dollar – and therefore the extent of the spread of the eurozone crisis – as well as the actions of the central bank. But in the longer term the riel is forecast to continue its slow downward trajectory, say most analysts.

The Economist Intelligence Unit (EIU), the research arm of The Economist magazine, predicts the riel will slide an average 1.3 percent against the greenback this year and in 2011, according to an April economic outlook. This compares to a 2.1 percent drop last year.

In the wake of current events, however, EIU’s projected year-end riel value of 4,214 riels to the dollar – the exact rate Thursday – looks increasingly optimistic without some kind of intervention.

Other key factors include Cambodia’s economic performance and government spending over the rest of the year.

“Fiscal consolidation is needed to avoid the risk of a more persistent exchange rate depreciation, which could fuel inflation and undermine competitiveness over time,” said the IMF’s Nelmes.

For longer term stability without intermittent central bank interventions, Nelmes said the economy must begin to rely more heavily on the riel and do so within a floating exchange rate system as employed at the moment.

The challenge for Cambodia in its bid to stabilise the local currency over the long term is therefore to create an appetite for the riel without resorting to strict currency regulations, a difficult task, according to economic analysts.

As noted by the EIU last month: “Given the continuing lack of confidence in the riel, the US dollar will remain the currency of choice in Cambodia for trade and investment.”

This leaves the riel at the mercy of a strong United States dollar for the time being as the central bank decides when, or if, it will halt the current slide.