TOKYO — The devaluation of Thailand's currency spread to the Philippines today as that country announced it will loosen controls on the peso, fueling the threat of a downward spiral across Southeast Asia if countries try to outdo one another in seeking a competitive edge.
The peso, long one of Asia's most stable currencies, quickly fell 12% to 29.45 to the dollar in early trading. Minutes later, dealings were temporarily halted.
Until today, both the Philippines and Malaysia were defending their currencies against speculators' selling pressure triggered by last week's Thai action. Now, some analysts see a broader devaluation in the region as likely and--if it is controlled--desirable.
By allowing their currencies to weaken in coming months, struggling Southeast Asian economies could benefit because devaluation would make their exports more competitive. And by effectively lowering wages in those countries, devaluation would also give U.S. companies still more reason to send work offshore, analysts say.
But devaluation also reduces a country's purchasing power and may harm local companies that have borrowed in dollars.
"I think no central bank in the region wants to be seen as having been pushed," said Tim Condon, an economist at Morgan Stanley Asia in Hong Kong. "But all of the currencies have some amount of overvaluation, and some weakening would be justified."
On Thursday, the Philippine central bank had raised overnight borrowing rates to 32% from 30% to make holding pesos more attractive. That rate, which helped hold the currency steady at 26.4 pesos to the dollar, was up from 24% late last week.
But early today, the bank reversed course.
"We will tolerate wider fluctuations to allow the market to fully operate in determining the value of the peso to the dollar," central bank Gov. Gabriel Singson said.
"The central bank will not intervene except to moderate the fluctuation of the rate," Singson said. "One reason we are doing it is to preserve our international reserves to prevent further deterioration."
He said the country's gross reserves total $10 billion. The bank had spent $1 billion propping up the currency in recent days.
Singson declined to comment on what kind of range the bank will let the peso trade within or at what level the bank would intervene. He insisted this was not a devaluation of the currency because the bank was not fixing a new trading rate for the peso.
While the bank did not announce a lower overnight borrowing rate, the looser controls on the peso should allow interest rates to fall, and that should be good for Philippine stocks, Condon said.
Indeed, the main Manila stock index zoomed 7.6% today, to 2,701, after plunging in recent days.
Meanwhile, Malaysia's currency, the ringgit, fell today to as low 2.4948 per dollar, down 0.2% from Thursday, as speculators targeted it for devaluation as well.
However, the Malaysian central bank has vowed to defend the currency--a pledge that sent Malaysian stocks down 2.4% on Thursday, on concerns about higher interest rates. (Investor Spotlight, D8.) The market continued to slide today.
Southeast Asian stocks in general were broadly lower on Thursday amid concerns about the ongoing ripple effects from Thailand's troubles.
Last week, Thailand abandoned a multibillion-dollar effort to keep its currency, the baht, pegged to a basket of currencies dominated by the dollar, effectively allowing it to be devalued by about 16%.
The Thai economy faces "short-term damage" from the baht's devaluation, but in the longer run the weaker currency should help boost Thai exports, said Ioka Ko, an analyst at Yamaichi Economic Research Institute in Tokyo.
With currency speculators still focused on the Philippines, volatility in the peso "may last for a while," and both the ringgit and Indonesian rupiah may come under greater pressure, Ko said.
"Some weakening of these countries' currencies can't be avoided," he said. "But if exchange rates go down to appropriate levels, the situation should calm down."
In fact, the battered Thai stock market has risen in baht terms since the devaluation but remains sharply lower in dollar terms.
Sharp exchange-rate shifts in one Southeast Asian nation can easily affect the economies of neighboring countries partly because these nations export competing products. Also, most have currencies that are at least partly pegged to the dollar.
This means there is a potential for the countries of the region to engage in competitive devaluations, even if for the moment most are more concerned about defending their currencies.