Big Mac Index Shows Asian Economies Out of Whack: William Pesek

Commentary by William Pesek

Aug. 1 (Bloomberg) -- Big Macs probably aren't much on the minds of Indians or Indonesians facing surging food prices. They should be very much in the thoughts of Asian central bankers.

The Economist magazine's ``Big Mac Index,'' which compares prices for McDonald's Corp.'s burger globally, is a light-hearted barometer of whether currencies are properly valued against the dollar. At times, it offers keen insights -- like how undervalued Asian currencies are at the moment. That may surprise some investors and annoy policy makers struggling to reverse things.

All the bellyaching from Asian officials over the last year about strong currencies damaging growth prospects was in vain. As of July 26, when the Economist published its 2008 index, 10 Asia- Pacific region currencies were undervalued against the U.S. dollar, many significantly so.

The Malaysian ringgit was the most out of whack, undervalued by 52.4 percent. Currencies also were below their true worth by 52.1 percent in Hong Kong, 48.7 percent in China, 47.9 percent in Thailand, 42.9 percent in Indonesia, 26.6 percent in Japan, and 18.2 percent in Singapore.

What is Burgernomics telling us about Asia? It's easier to hold down exchange rates than to drive them higher.

Asia spent much of the last decade obsessed with exchange rates. The region made it an art form to talk up currencies. Untold billions of dollars were used intervening in markets to beat back bullish speculators. Controls on the flow of capital were imposed here and there.

Inflation's Return

It worked brilliantly to support all-important export industries. That was, until the dollar began sliding. Next came a near doubling in the price of crude oil. Food costs surged, too. While the phenomena have numerous causes and many moving parts, the end result was a return of inflation.

The sudden onset of rising prices came as a surprise to those who had listened to economists such as former Federal Reserve Chairman Alan Greenspan. They painted a warm and fuzzy picture of a world in which technology, globalization and market innovations had repealed the business cycle. Their argument was that the inflation risks of the past were no more.

What they missed was the emergence of a new kind of business cycle -- one involving bicycles.

In cities such as New York, London and Tokyo, more and more motorists are trading cars for bicycles to save on energy costs. Such decisions by wealthy-nation consumers are being driven by the aspirations of developing-nation ones. From Mumbai to Beijing to Sao Paulo, consumers are swapping bicycles for cars, which is boosting demand for energy.

Currency Weakness

As that global adjustment plays out, Asian policy makers are realizing they have a worsening inflation problem on their hands. They have tried reducing fuel subsidies, raising interest rates and strengthening currencies. What they may get for their efforts is an extended run of stagflation.

Things might have turned out differently if steps had been taken to boost currencies, say, five years ago. Firmer exchange rates would have meant less imported inflation over the last 24 months. Now, it's all being done at once.

Policy makers must try harder to convince markets, according to Benjamin Pedley of LGT Investment Management Ltd. in Hong Kong. Many investors, he says, still think ``its all about Asia's appetite for export growth, getting it up and keeping it up.''

Asia, in other words, has been holding down currencies for so long it has almost created a psychological price ceiling that traders are reluctant to breach.

Also, the combination of a global credit crunch and widespread risk aversion is rarely good for emerging-market currencies. ``In the short run, people are focusing on weaker Asian growth,'' says Callum Henderson, head of currency strategy at Standard Chartered Bank in Singapore.

Merrill's Savior

News that the once mighty Merrill Lynch & Co. is being saved by Singapore reminded investors just how precarious markets are. Temasek Holdings Pte., the government-owned fund that became Merrill's biggest investor in December, will buy $3.4 billion of new stock in the third-biggest U.S. securities firm.

The lack of strong leadership in Asia also is working against efforts to boost exchange rates. You have political turmoil in Malaysia and Thailand, paralysis in Japan, India and South Korea and rising poverty rates in Indonesia and the Philippines. China, meanwhile, is moving in the other direction, favoring less yuan appreciation.

Few nations dramatize Asia's predicament better than Korea. Last month, a group of 118 economics and business professors called on Korean Finance Minister Kang Man-Soo to resign for pursuing ``irrational'' policies that fanned inflation and hurt the economy.

Buy a Burger

Kang's sin was holding down the Korean won to boost growth. The policy helped fuel the fastest inflation in almost 10 years, eroding household incomes and corporate earnings. While Kang has tried to reverse course, the won is the second-worst performer of the 10 most-active Asian currencies outside of Japan.

Investor perceptions aren't easily changed. Asia's policy makers need to step up efforts -- and get more creative -- when it comes to boosting currencies. All it takes to see that is to buy a burger.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net