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AseanAffairs Magazine March - April 2011
CONTENT • ASEAN TECH
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A NEW REALIGNMENT or CONTINUING CHAOS?
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By

Paul A. Ebeling, Jnr


 

 

 

 

 


In recent issues Asean Affairs has been following the effects of capital inflows into Asian countries. Recently the central banks of Thailand and Korea raised their interest rates signaling that a new round of capital inflows into the region is on the way following a brief respite. The author looks at how Asean countries can more effectively manage these inflows.

  Emerging economies in Asia must learn to manage the entry of foreign investments in the region to mitigate the impact of any abrupt change in capital inflows that could destabilize their financial health, a report released by the Asian Development Bank (ADB) said in 2010.

Capital inflows into Asean countries plus Hong Kong, India, South Korea and Taiwan in 2009 and the first half of 2010 as measured in percentage increases above an historical average.

While the surge in foreign investments to emerging Asia is welcome, the Manila-based multilateral lender said the capital inflows have been mainly in short-term investments representing portfolio and speculative investments caused by the wide key interest -earning differences between the emerging financial markets versus the developed ones.

The Asia Capital Markets Monitor, ADB’s assessment of performance and outlook for the region’s equity, bond and currency markets, says that the strong rebound in capital inflows during the 18 months has been primarily driven by portfolio equity flow. Equities in emerging Asia yielded 75 percent returns in 2010 over 2009, while local currency bond issuance totaled US$3.69 trillion, 41.4 percent higher than in 2008. Emerging Asian currencies have also strengthened to varying degrees versus the US dollar, it said. “While emerging Asian economies may welcome the new capital inflow, this action can pose several potential problems for the stability and sustainability of the region’s economic recovery,” ADB said.

Past experience shows that surges in such capital flows can face an abrupt reversal, something which Asian authorities should be prepared for by considering a full array of policy measures available in their toolkit to manage a surge in capital inflows. “While the return of capital flows is welcome, rises in short- term capital inflow could potentially leave countries vulnerable to a sudden reversal in portfolio investment, and to sharp currency movements,” Srinivasa Madhur, Senior Director of ADB’s Office of Regional Economic Integration, said.

Addressing this, Mr. Madhur said the key challenge for the governments in emerging Asia is to learn how to manage the huge capital flows that enter the region’s interest rate markets. Managing the capital inflows is done through macroeconomic policy measures, a flexible foreign exchange regime, resilient financial systems, and temporary and targeted capital controls, he said.

The effective management of capital flow requires a broad, consistent policy that extends beyond the traditional monetary, fiscal, and exchange rate policies to include trade, and investment policy and regulation plus the development of the financial sector, as such this will create an economic environment conducive to stable long-term capital flows.

While the emphasis of necessary policy adjustments should be on the longerterm goal of achieving an economic environment that will attract stable capital flow, policymakers also must consider options to manage short-term rises, and sudden swings, which can threaten stability and undermine longterm strategies to strengthen economic fundamentals......................

 
Paul A. Ebeling, Jnr., Co-Founder Ebeling Heffernan Mr. Ebeling’s 45-year business career includes investment banking, market and business analysis across his wide area of interest, which include the world public markets in equities and commodities, design, engineering, construction, construction finance, real estate, planned community development, motion picture finance and production, art, literature and music. Mr. Ebeling’s dedication and effort with the Ebeling Heffernan executive team has led to many business opportunities worldwide. Ebeling-Heffernan www.livetradingnews.com
>> “WHILE EMERGING ASIAN ECONOMIES MAY WELCOME THE NEW CAPITAL INFLOW, THIS ACTION CAN POSE SEVERAL POTENTIAL PROBLEMS FOR THE STABILITY AND SUSTAINABILITY OF THE REGION’S ECONOMIC RECOVERY,” ADB SAID.<<

 

 

 

 

 

 

 

 

 

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