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

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

“We’re not particularly worried about inflation driving policy, but exchange rate weakness, dollar liquidity drying up, those things [are] a bigger issue, [and issues such as] the balance of payments angle,” Baig told CNBC’s “Street Signs Asia.”

“If indeed input prices are going up for next year, even a country like India — which produces a lot of food for itself and exports to the rest of the world — would start becoming a bit insecure about food supply for 2023,” he said.

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

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

“The issue is in Europe, but that affects energy prices worldwide,” he said, adding that supply side inflation is very likely to remain elevated all through 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 policies.

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

“So this is why even a country like India, which is a darling of investors these days, I think still faces substantial 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 the dollar is nearing its peak. The IMA managing director said Thursday that central banks of the better emerging economies will continue to increase interest rates in anticipation of more tightening in the U.S.

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

He added he does not expect emerging market currencies, some of which are down by 6% to 8% over the past year, to go down further. He predicted these currencies to start rebounding to their previous levels by early next year.