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Opinion: Should Asia Grab the "Hot Money" while it lasts?

By  Paul A. Ebeling, Jnr
AseanAffairs     14 October 2010

"Hot Money" is the new capital problem for government policy makers in some developing Global economies. 

How about Thailand as an example, whose government has recently imposed a 15% withholding tax on interest and capital gains earned by foreign players in Thai bonds?

The major concerns are twofold:

1. That raising currencies will soon become not competitive, and

2. is that Hot Fast Money will make economies vulnerable to Booms and Busts.

These are real concerns of course but not all Fiat Capital inflows are bad.

If this kind of "Cash" can be locked in at cheap rates, turned to productive use, it can even be a good thing.

One of the best ways of doing so is for the local companies in the "target" economies to take advantage of the current boom in the IPO cycle.

If International players and investors want to throw money at Indian coal, Malaysian chemicals or Asian insurance, the new issuers, who are often governments, would be foolish to say No, IMO. Why? well money that is invested in an IPO cannot taken back so easily. Of course shareholder can sell their shares, but when they do, they hurt themselves not the issuers.

Money invested in IPOs has 2 characteristics that make it better than other types of "Hot Money" as it is equity, and long term.

The worst kind of "Hot Money" is short-term debt, especially that which is issued in a foreign currency, because when that cash flows away (and it does as it roams the World markets looking for the best rate of return), the borrower is left out in the weather. This kind of action can be a major problem in the emerging market, the kind of action that can cause crisis Between those 2 extremes, there are of course ordinary portfolio flows in the secondary market, not as good as IPO money or Direct Foreign Investment, but much better than short-term foreign currency borrowing for sure.

The the inflow of IPO money still boosts the currencies of countries on the receiving end, but if the capital is deployed in productive investment, at least there can be a relatively good outlook.

Where the seller is the state, that new Hot Cash could even be put aside such places as rainy-day funds or invested in the developed world as China is doing in some instances. Seem funny? If developing countries believe that "Hot Money" from abroad is inflating their markets, i believe it would be a very profitable trade.

By

Paul A. Ebeling, Jnr