To be sure, the seeming resumption of global growth heralded in the just-released April 2010 IMF World Economic Outlook is mirrored in increasing demand for commodities--hence the performance of CDN and AUD. Somewhat less obvious, though, has been the performance of the Russian ruble and the Indonesian rupiah. By now, I'm sure you've heard of how Indonesia suffered tremendous turmoil during the 1997/98 Asian financial crisis that saw its GDP shrink by double-digit figures as capital flight mounted. In turn, the Asian contagion affected global demand for energy; Russia was particularly hard-hit as the price for a barrel of oil hurtled below the $10/bbl mark. With such headwinds, both had to borrow from the IMF. (As an aside, I remember taking a trip to Putin's St. Petersburg in 1996 and being told not to convert money into rubles as locals preferred dollars. Little did I know that things would get even worse.)
In 2010, however, we see both a resilient Russia and Indonesia. Not only are both experiencing renewed bouts of currency strength due to the rebound in commodity prices, but both are also plays on faster growth in developing nations as risk appetite improves. Still, not all is well as fears of both speculative inflows and assorted bubbles ensue. From the FT:
Vladimir Putin, Russia's prime minister, declared on Tuesday that the country’s one-year recession was over. But the optimistic overview failed to mention the country’s main economic worry: the rapidly appreciating rouble.And then there's Indonesia:
With economic recovery, a higher oil price and speculative capital inflows driving Russian equities up 130 per cent last year, the rouble has appreciated from 33.5 to the dollar a year ago to around 29 to the dollar today. The situation is a welcome change for the government from the first half of 2009, when the central bank sold billions of dollars to save the plummeting currency.
But while the strong rouble may be a positive signal for investors, it has created its own problems: economists are worried about export competitiveness and, worse, the possibility of a new asset bubble. Both could threaten the meagre growth that has been achieved since January, following an 8 per cent fall in economic output in 2009. Mr Putin, speaking in parliament, predicted growth would be a modest 4 per cent in 2010.
Kingsmill Bond, chief strategist at Troika Dialog, a Moscow investment bank, said the rouble’s rise was entirely in line with oil prices. “An oil price of around $80 implies a rouble-to-dollar rate of say 28-30.”
Since the central bank is targeting inflation it has to run a flexible foreign exchange policy. “A flexible exchange rate is an integral element of a formal inflation targeting system, as you cannot target both the exchange rate and inflation at the same time” said Odd Per Brekk, the International Monetary Fund’s Moscow representative. “From this perspective, the increased flexibility of the rouble that we have seen recently is a welcome move.”
But Mr Bond said there were risks in allowing the currency to appreciate too much. “The risk is that large inflows of hot money would make the rouble too strong and reignite inflationary pressures.” Russia’s central bank has tempered investor interest by lowering interest rates, cutting the benchmark refinancing rate by a total of 475 basis points in the past year to a record low of 8.25 per cent.
The Indonesian rupiah has been one of the strongest performing currencies in Asia over the past 12 months, rising more than 25 per cent, due largely to foreign capital inflows driving gains on the stock and bond markets.It's a whole new world; a dazzling place I never knew.
Some exporters have complained that a further increase in the rupiah-dollar rate could erode demand for Indonesia’s cheap manufactured goods, but there are few signs yet of any serious impact on industry. A small group of exporters is concerned about the rapid increase but most analysts say the strong rupiah attests to solid economic fundamentals, reduces interest rates and spurs growth.
Loans would become cheaper and domestic consumer demand, which contributes around 70 per cent to Indonesian gross domestic product, would rise, said Fauzi Ichsan, chief economist at Standard Chartered Bank’s Indonesian unit. “For manufacturers of exported goods, the stronger rupiah can be neutral because they often import raw materials, which get cheaper,” he said. “Those at the greatest risk to lose are manufacturers with rupiah costs.”
Commodities, such as crude palm oil and coal, Indonesia’s main export products, that have risen sharply as oil prices recovered over the same period, are facing similar challenges. But, as Mr Ichsan said: “Commodities prices have been rising too, so they can’t complain.”
However, Ade Sudrajat, head of the Indonesia Textile Association, is still worried. The sector has felt a “mild impact” and he hopes the currency will weaken again soon after a 30-month high of 9,038 to the dollar last week. “We’re hoping the government will control the fast appreciation of the rupiah against the dollar,” he said. The central bank would intervene to prevent sudden fluctuations, said Budi Mulia, Bank Indonesia deputy governor, but was “not going to fight the regional strengthening of currencies”.