Dollar strength is more worrying than inflation for Asia, says economist

Exchange rate weakness in the face of a strong U.S. dollar is a bigger concern for Asia than inflation, Taimur Baig, CEO of DBS Bank in Singapore, told CNBC on Thursday.

“We’re not particularly concerned about inflationary policies, but exchange rate weakness, dollar liquidity drying up, these things [are] a bigger problem, [and issues such as] the balance of payments angle,” Baig told CNBC’s “Street Signs Asia.”

“If input prices actually go up for next year, even a country like India ̵[ads1]1; which produces a lot of food for itself and exports to the rest of the world – will start to feel a little uncertain about its food supply for 2023,” he said.

Baig, who is also chief economist at DBS, said a global energy crisis feeding inflation could lead to a bleak winter ahead.

“I think it’s very difficult to see how the gas situation for Europe is going to be resolved anytime soon … China has yet to come out of … its zero-Covid policy. [The energy crisis] is not only an issue in terms of keeping homes warm, it is also a very big factor in determining the outlook for food inflation for next year,” Baig said.

“The problem is in Europe, but it affects energy prices worldwide,” he said, adding that supply-side inflation is likely to remain high throughout 2023 with “adverse implications” for the global economy.

The economist said there is “room and need” for Asian countries to support their economies through fiscal policy.

“On the monetary policy side, unfortunately, there is no respite. They have to raise interest rates to slow the economies to keep the current account on a sustainable basis,” Baig said.

“So this is why even a country like India, which is a favorite among investors these days, I think still faces significant headwinds going into 2023. And of course the other big headwind in Asia is China, for its own idiosyncratic reasons. ” he said.

Separately, IMA Asia’s Richard Martin told CNBC that the dollar is nearing a peak. The IMA’s chief executive said on Thursday that central banks in the better emerging economies will continue to raise interest rates in anticipation of more tightening in the US

“And … as they close that yield gap, the additional pressure into US dollar assets starts to ease back,” Martin told CNBC’s “Street Signs Asia.”

He added that he does not expect emerging market currencies, some of which are down 6% to 8% in the past year, to decline further. He predicted that these currencies would begin to return to their previous levels early next year.