VINACHEM

Asia’s tumbling currencies will not spell strong exports for the region as a combination of surging inflation and high interest rates slows the pace of global economic activities.

Under normal circumstances, a weak currency is a boon for exports, but  current conditions are far from normal.

Export opportunities to energy crisis-hit Europe have opened for Asian petrochemicals, aided by recent declines in freight costs and amid a demand slowdown in China, whose consumption remains blighted by COVID-19 lockdowns.

But the euro is in the same boat as Asian currencies – reeling from the mighty US dollar which deters imports. The euro has shed more than 15% since the start of the year.

Falling freight rates make for a conducive market environment for Asian exports, but global demand at its very core is weakening amid high inflation, high interest rates and recession looming in 2023.

The World Trade Organization (WTO) expects Asia’s export growth to decelerate to  1.1% in 2023 from a projected 2.9% expansion this year.

World merchandise trade volumes will still increase, but at a markedly lower pace of  1% next year, lower than the previous estimate of a 3.4% increase and the projected 3.5% growth in 2022, the WTO said.

Global GDP growth is projected to weaken to 2.7% next year, with about one-third of the world economy facing two consecutive quarters of negative growth, the International Monetary Fund (IMF) said in its October World Economic Outlook (WEO) report.

The forecast represents a further slowdown from a projected 3.2% expansion in 2022, coming from an actual 6.0% growth in 2021.

WEAK CHINA OPENS UP EXPORT OPPORTUNITIES

“Without doubt, Middle East and Asian exporters will be searching for every export opportunity that’s workable because of the collapse (and this is no exaggeration) of Chinese demand and imports,” ICIS senior Asia analyst John Richardson said.

China, the second-biggest economy in the world, is slowing down, with GDP growth projected to decelerate to 2.8%, coming from an 8.1% expansion in 2021, because of COVID-19 lockdowns and amid a real estate market downturn, according to World Bank’s forecast.

It was, by far, the most pessimistic outlook on the Chinese economy among multilateral institutions.

Global financial watchdog – the IMF – cut its growth forecast for China to 3.2%, down from 3.3% in July, while the Asian Development Bank (ADB) has a 3.3% forecast for the giant economy.

In the second quarter, the Asian behemoth barely grew, logging a 0.4% annualized GDP increase.

For polypropylene (PP), trade data so far were not conclusive that more cargoes from the Middle East and Asia flowed into Europe in recent months, Richardson said.

“It does seem probable, though, because container freights from China to Europe have come down sharply this year on the collapse of demand for durable goods,” he said.

“But record-high inflation in Europe is, of course, damaging the region’s polymers demand, more so in PP than in polyethylene (PE), as a bigger proportion of PP consumption is into durable goods end-use markets such as autos and white goods,” he added.

Both Europe and Asia, already reeling from strong energy prices, are fending off additional inflationary pressures borne of the strong US dollar, which makes dollar-denominated commodities more expensive.

“If European inflation persists at today’s levels, therefore, or gets worse, further demand destruction could limit export opportunities to Europe for Middle East and Asian PP exporters. A further complication is what happens with European energy supply this winter,” Richardson said.

European PP and polyethylene (PE) markets currently trade at premiums over China and southeast Asia markets, “well above their long-term averages”, he said.

“But if the European economy keeps on weakening, with no further local PE and PP production issues, netbacks may become unworkable,” he added.

Meanwhile, China is also bearing down on the whole of Asia as the country is a major intra-regional export market whose economic weakness, give its size, is impossible to be offset by the relative strength of southeast Asia.

Chinese imports are being deterred by the weakness of the yuan, which has depreciated by more than 10% since the start of the year.

The ASEAN 5 economies – comprising Indonesia, Malaysia, the Philippines, Thailand, and Vietnam in IMF’s definition – are faring relatively well, with annual growths projected at above 5% for both 2022 and 2023.

But these economies are also dealing with much weaker currencies, led by the Philippine peso (Ps), which tumbled by more than 15% so far this year.

Export prospects for petrochemicals could also be stymied as Asia’s own production is also being threatened by surging costs and thinning margins as currencies continue to plunge against the mighty US dollar.

TRADE DEFICITS BALLOON AS CURRENCIES WEAKEN

Energy import-reliant Asia is witnessing ballooning trade deficits as hits from elevated commodity prices are being magnified by the sharp depreciation of currencies in the region against the US dollar.

Among the heavy-hit currencies in the region are the Japanese yen (Y), the South Korean won (W) and the Indian rupee (Rs).

The Japanese yen has shed its “safe-haven” coat this year and continued to be  pummeled as the Bank of Japan has kept its ultra-low interest rates, in stark contrast with the US Fed’s aggressive monetary tightening stance.

On Monday, the yen was trading at nearly Y149 against the US dollar, further sliding from a 32-year low of above Y147 hit on 14 October.

In September, the heavy depreciation had triggered a government intervention to prop up the currency.

At a parliamentary session on Monday, Bank of Japan governor Haruhiko Kuroda said that ultra-low interest rates will be maintained to support the economy, Japanese newswire agency Kyodo reported.

Japan finance minister Shunichi Suzuki, meanwhile, warned of another “decisive” action to stem the yen’s wild swings.

In August, Japan’s chemical exports increased by 16.3% year on year to Y989.1bn, with plastic shipments up 1.9% at totaled Y245.0bn although volume declined by 14.8% year on year to 407,038 tonnes. September data will be released late in the week.

A bad combination of heavy currency depreciation and elevated energy cost is bloating Japan’s trade deficit.

In August, the trade deficit of the world’s third-biggest economy stood at Y2.82tr, more than quadruple its size in the same period last year, with import value growing at more than twice the level of export expansion.

The story is the same for South Korea, whose currency – the won – tumbled by a fifth of its value since the start of the year against the US dollar.

A highly industrialized economy, South Korea posted a $3.8bn trade deficit in September as imports grew 18.6% year on year to $61.2bn against exports’ measly 2.8% increase to $57.5bn.

“Imports of three major energy sources (crude oil, gas, coal) leaped due to high prices and efforts to secure winter season fuel,” the country’s Ministry of Trade, Industry and Energy (MOTIE).

September petrochemical exports slumped 15.1% year on year to $4.07bn .

India, which is a giant emerging market in south Asia, had logged a record monthly trade deficit of $31bn in July as import values surged because of the continued rupee slump.

The trade deficit has eased in August and September, but remained high at above $25bn.

In April-September 2022, the first six months of India’s fiscal year ending March 2023, the south Asian nation’s trade deficit nearly doubled to $148.5bn.

Over the same period, the Reserve Bank of India (RBI) has raised its key overnight rates by a total of 140bps to 5.90%, taking the cue from the US’ Fed.

Still, the rupee continued to plumb new depths, hitting a record low closing of Rs82.85 on 10 October after briefly crossing Rs83.

“The uncertainty around the [Russia-Ukraine] war and the pace of monetary tightening going ahead are imparting sizeable volatility to global financial markets, while also lending safe haven demand to the US dollar,” India’s central bank had stated in its Monetary Policy Report – September 2022.

“These developments are generating large adverse spillovers to emerging market economies and posing sizeable downside risks to their growth prospects,” it added.

The US dollar is expected to remain strong for the remainder of the year, with inflation in the world’s biggest economy remaining high.

Asia will have to brace for continued intense depreciation pressure for its currencies while tempering expectations of strong export benefits.