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Tuesday, March 10, 2009

UBS Southeast Asian Focus - ASEAN: Exports and exchange rates

The last six months have seen extraordinary weakness in export growthand some sharp movements in exchange rates. How has this impacted thecompetitive landscape? While the demand shock appears to have beenalmost universal, could the recovery be influenced by the change incompetitive positioning as a result of exchange rate moves?

In Southeast Asia, the decline in exports has touched all countries andsectors (with a few exceptions). As the dust settles, we find ASEANcompetitiveness in terms of exchange rate movements has, Indonesiaexcluded, not improved relative to earlier in the decade. This suggeststhat existing capacity will determine the vast majority of corporates'production decisions in coming months.

However, the large decline in the Korean won may, in time, play a roleat the margin regarding export market share developments. It may alsoaffect ASEAN exchange rate policy over time. While exporters or labourrepresentatives may not now be crying loudly for weaker exchange ratesto enhance competitiveness, they may do so at some point. Irrespectiveof Korea's export performance, the rise in layoffs from themanufacturing sector in particular may cause governments to reconsidertheir positions on the exchange rate.

Our standing currency views for ASEAN ex-Singapore continue to be fornear term overshooting in terms of weakness, followed by some regainingof lost ground into the end of the year. Indeed, UBS FX Strategist'shave adjusted there short term forecasts further in this direction (seebelow table). Our longer term views currently assume a second halfimprovement in regional and global growth. In the absence of this or inthe face of substantial export market share losses to Korea or others,we would look to be become more bearish on ASEAN currencies. We still donot expect currencies (Singapore's excepted) to be managed lower, butgovernments may become much less interested in standing in the way ofmarket forces.

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