Moody’s Says Prolonged Weak Dollar Would Benefit Asia

AKP Phnom Penh, October 26, 2020 —

Moody’s Investors Service says that any prolonged dollar weakness is likely to benefit Asian borrowers outside of Japan but have a limited impact.

In a statement issued in Singapore Monday, the US credit rating agency said “some market experts” had suggested a period of a prolonged week dollar is on the horizon.

“While this would weigh on the profitability of some companies with significant US dollar revenues, it would lower debt-servicing costs for Asian ex-Japan issuers and have a limited impact overall,” it said.

Moody’s Assistant Vice President Deborah Tan said a weaker dollar would “support the region’s credit conditions by reducing debt-servicing costs for dollar-denominated debt and encouraging capital inflows as Asian assets become relatively more attractive.

“However the region could see some differentiation in capital inflows, with more support for the Chinese renminbi, Korean won and Taiwanese dollar, given their economies’ stronger fundamentals, growth trajectories and better handle over the pandemic,” she added.

The statement said countries with big foreign-currency liabilities – such as Sri Lanka, Indonesia and the Philippines whose foreign currency debt accounts for more than a third of total debt – “could potentially reap savings from the weaker dollar.

“But the deterioration in their fiscal metrics due to the pandemic would more than offset the potential benefits, leading to a limited overall impact.

“At the same time, the weaker dollar would pose some negative effects in the form of reduced profit margins for companies with significant US dollar revenues.”

Moody’s concludes that the dollar’s status is “secure for now” as a global reserve and transaction currency.

“As the durability of rival platforms and international financial arrangements remains uncertain, the pace of transition out of the dollar will likely be gradual and unlikely to dampen its dominance,” Tan said.

In its latest annual report on Cambodia, the International Monetary Fund (IMF) says dollarisation “remains high” in Cambodia.

The report said foreign currency deposits accounted for more than 94 percent of all deposits in August last year, albeit down from about 96 percent a decade earlier.

Foreign currency claims on the private sector represented about 99 percent of total claims, up from about 97 percent in the same month in 2019.

“Continued financial deepening in the context of near full dollarisation suggests that foreign currency deposits are likely to continue to grow,” the IMF said.

Yet Cambodian authorities remain “fully committed to implementing policies to promote greater use of the Khmer Riel,” it said.

The authorities “underscore the importance of maintaining exchange rate stability as a nominal anchor to help keep inflation manageable.

But “they are aware that a high degree of dollarisation continues to limit the National Bank of Cambodia’s (NBC) ability to implement monetary policy effectively.”

By Sao Da