Stop Kina from sliding further A falling Kina is a concern because it is a signal of weakness to the external world, and a weaker currency makes it more expensive to buy imported goods, which in turn aggravates the problem of inflation. And a softening Kina increases the implicit cost of PNGs high foreign debt. The government’s reaction has been predictable: Treasury Minister and Governor of Bank have been assuring the public and investors that the drop in the currency is a temporary phenomenon (due to low commodity price and winding down of LNG construction phase) as well as that has also been witnessed in other countries and that they continue to assure that their fiscal policies will be stabilizing the Kina or if not pinning very much on LNG and Nickel exports. The question, however, is whether their reassurances are enough to stem the Kina’s fall. To answer that, we have to look at the two sets of factors working to undermine the Kina. The first is fundamentals and the other is sentiment, both domestic and global. Foreign direct investments and other inflows have not quite made up for the trade deficit, and this the Bank of PNG need to report correctly or truly in their quarterly updates rather than giving incorrect report and raising false hope. PNG’s balance of payments has turned perverse, which justifies a decline in the Kina. This explains to a large extent an apparent paradox in the global currency market, where the dollar has been weakening against the euro, yet has strengthened against the currencies of most emerging markets that have been recipients of fund flows. Brazil’s currency has depreciated 7 percent in May, while the Mexican peso has fallen 4.9 percent, the South Korean won by 2 percent and the Russian ruble by 3.5 percent. This is a point that the PNG government may have been emphasizing, that the Kina’s fall is part of a global phenomenon and so there is no reason to worry as things will settle down eventually. The problem is that when fear sets in the foreign exchange market, it often reinforces the fundamentals. The threat of a further decline in the currency causes importers to rush in to buy dollars while exporters will hold back their dollars for conversion, thus exacerbating the demand-supply gap. So, with all eyes on the Kina, investors are waiting for central bank to intervene in the market. This usually starts with some large public-sector banks selling dollars in the market, which could have been one reason for tempering of the Kina’s fall quite recently. The second defense is through direct intervention by the Bank of PNG to sell dollars in the market. Here are three ways Central Bank and the Treasury could stop the Kinas decline without changing current policy too much. 1. borrow Kinas and buy assets in other currencies but PNG is already highly indebted so may not be the best option 2. Build a credible plan to reduce deficits. In the budgeting round, if not sooner, the government needs to spell out very specifically how it will get to commanding percentage and lower as soon as possible. However, the 2014 budget did not reflect any comprehensive measure. 3. One reason for declining currencies is expected differences in interest rates. The world came together to coordinate interest rates cuts during the crisis. The idea is that highly indebted nations weaken the value of their currency by cutting interest rates down to zero and printing fiat currency in order to gain trade advantages (cheaper products to export) and to pay less debt service on their bonds. The policy can trigger retaliatory action by other countries that in turn can lead to a general decline in international trade, harming all countries. The second, is an indication of determined stockpiling of the currencies of other countries in order to weaken your own currency.
Posted on: Wed, 04 Dec 2013 00:10:44 +0000
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