Tweet
Asia faces challenge of channelling floods
By Robert Cookson and Kevin Brown
Published: October 13 2010 18:59
As money surges with ever greater force from the west into emerging markets, nowhere does fear of asset bubbles and currency volatility run deeper than in the fast-growing economies of Asia.
Foreign capital has rushed into the region€™s bond and equity markets this year, driving the region€™s currencies sharply higher against the dollar and raising the prospect of a sharp response from Asian policymakers.
Indeed, some governments have begun to react.
Thailand on Wednesday introduced a tax on foreign holdings of government bonds, a move designed to curb potentially destabilising inflows. Other Asian countries, many of which are already intervening in the foreign exchange markets to slow the rise of their currencies, could follow Thailand€™s example and impose their own capital controls in coming months.
€œThe environment is very ripe, riper than at any point in recent decades, for a big surge of capital inflows into Asia,€ says Rob Subbaraman, chief Asia economist at Nomura.
But with the Federal Reserve expected to flood the world with cheap dollars should it embark on a second round of emergency monetary loosening to prime the US economy, the question is whether capital controls stand a chance.
The pace of inflows into Asian markets, as investors have sought higher-yielding currencies, has been dizzying. Net private capital flows to emerging Asia are forecast to reach more than $270bn in 2010 and as much again in 2011, according to the Institute of International Finance.
As a result, Asian currencies have appreciated sharply, putting pressure on exporters that are the backbone of many of the region€™s economies.
The Thai baht has jumped nearly 12 per cent this year, to its highest against the dollar since the Asian financial crisis of 1997-1998.
The Malaysian ringgit has climbed almost 11 per cent, the Philippine peso has risen 6 per cent, and the Indonesian rupiah is up 5 per cent.
€œWe are going to see the introduction of controls across Asia, it€™s just a question of how radical they will be,€ says Dariusz Kowalczyk, a strategist at Crédit Agricole.
Thailand€™s move, a 15 per cent tax on capital gains and interest payments for government and state-owned company bonds, has irritated foreign investors.
But it is unlikely to do much to curb flows into the country, analysts say. €œForeign investors piling into Thailand are not doing it so much because of returns on bonds or equity price gains but because they want to buy the baht,€ says Mr Kowalczyk.
The view that Asian currencies will continue to appreciate against the dollar, strengthened now by this week€™s Fed minutes showing a consensus in favour of more monetary easing, is likely to remain one of the dominant forces driving capital flows into the region. Moreover, Asian central banks have started to raise interest rates, even as US rates remain close to zero. That widening interest rate differential with America is expected to tempt more yield-hungry investors to Asian markets.
Faced with the risk of asset bubbles, which would lead to an eventual crash, capital controls are seen by some governments as a sensible move. The International Monetary Fund says such controls are €œa legitimate part of the toolkit to manage capital inflows in certain circumstances€.
Analysts, though, argue that Asian policymakers will shy away from introducing capital controls that are tough enough to have a serious impact on foreign inflows. They believe governments will prove reluctant to introduce overly onerous transaction taxes or limits in case they choke off vital foreign investment or trigger capital flight.
Restrictions on the movement of capital, moreover, are outlawed in many trade agreements.
Furthermore, while the qualified endorsement of capital controls by the IMF and other multilateral institutions has paved the way for their use by countries such as Thailand, economists are sceptical about their long-term value. The IMF says that controls can reduce currency appreciation and the formation of asset bubbles, but at the cost of reduced economic efficiency and development of financial markets.
Kristin Forbes at the Massachusetts Institute of Technology says that evidence from previous experiments with controls is mixed, with no significant impact on the volume of capital inflows or currency appreciation. The only observable consistent effect, she says, is that controls can shift flows into financial instruments with longer maturities.
Controls, too, often hit small and medium-sized companies harder than big ones, and can therefore have serious implications for productivity and growth in countries that rely heavily on SMEs, as many emerging Asian nations do.
Ms Forbes believes the main weakness of capital controls is that market participants usually find a way around the regulations. That makes them better suited to dealing with a temporary crisis than a long-term shift in flows, which is what Asia€™s emerging nations are probably experiencing. "If the main benefit is longer maturities, this can be done in other ways," she says.
As the Fed turns on the taps, Thailand, for one, may need to think more creatively.
Additional reporting by Tim Johnston and Roel Landingin
Copyright The Financial Times Limited 2010
By Robert Cookson and Kevin Brown
Published: October 13 2010 18:59
As money surges with ever greater force from the west into emerging markets, nowhere does fear of asset bubbles and currency volatility run deeper than in the fast-growing economies of Asia.
Foreign capital has rushed into the region€™s bond and equity markets this year, driving the region€™s currencies sharply higher against the dollar and raising the prospect of a sharp response from Asian policymakers.
Indeed, some governments have begun to react.
Thailand on Wednesday introduced a tax on foreign holdings of government bonds, a move designed to curb potentially destabilising inflows. Other Asian countries, many of which are already intervening in the foreign exchange markets to slow the rise of their currencies, could follow Thailand€™s example and impose their own capital controls in coming months.
€œThe environment is very ripe, riper than at any point in recent decades, for a big surge of capital inflows into Asia,€ says Rob Subbaraman, chief Asia economist at Nomura.
But with the Federal Reserve expected to flood the world with cheap dollars should it embark on a second round of emergency monetary loosening to prime the US economy, the question is whether capital controls stand a chance.
The pace of inflows into Asian markets, as investors have sought higher-yielding currencies, has been dizzying. Net private capital flows to emerging Asia are forecast to reach more than $270bn in 2010 and as much again in 2011, according to the Institute of International Finance.
As a result, Asian currencies have appreciated sharply, putting pressure on exporters that are the backbone of many of the region€™s economies.
The Thai baht has jumped nearly 12 per cent this year, to its highest against the dollar since the Asian financial crisis of 1997-1998.
The Malaysian ringgit has climbed almost 11 per cent, the Philippine peso has risen 6 per cent, and the Indonesian rupiah is up 5 per cent.
€œWe are going to see the introduction of controls across Asia, it€™s just a question of how radical they will be,€ says Dariusz Kowalczyk, a strategist at Crédit Agricole.
Thailand€™s move, a 15 per cent tax on capital gains and interest payments for government and state-owned company bonds, has irritated foreign investors.
But it is unlikely to do much to curb flows into the country, analysts say. €œForeign investors piling into Thailand are not doing it so much because of returns on bonds or equity price gains but because they want to buy the baht,€ says Mr Kowalczyk.
The view that Asian currencies will continue to appreciate against the dollar, strengthened now by this week€™s Fed minutes showing a consensus in favour of more monetary easing, is likely to remain one of the dominant forces driving capital flows into the region. Moreover, Asian central banks have started to raise interest rates, even as US rates remain close to zero. That widening interest rate differential with America is expected to tempt more yield-hungry investors to Asian markets.
Faced with the risk of asset bubbles, which would lead to an eventual crash, capital controls are seen by some governments as a sensible move. The International Monetary Fund says such controls are €œa legitimate part of the toolkit to manage capital inflows in certain circumstances€.
Analysts, though, argue that Asian policymakers will shy away from introducing capital controls that are tough enough to have a serious impact on foreign inflows. They believe governments will prove reluctant to introduce overly onerous transaction taxes or limits in case they choke off vital foreign investment or trigger capital flight.
Restrictions on the movement of capital, moreover, are outlawed in many trade agreements.
Furthermore, while the qualified endorsement of capital controls by the IMF and other multilateral institutions has paved the way for their use by countries such as Thailand, economists are sceptical about their long-term value. The IMF says that controls can reduce currency appreciation and the formation of asset bubbles, but at the cost of reduced economic efficiency and development of financial markets.
Kristin Forbes at the Massachusetts Institute of Technology says that evidence from previous experiments with controls is mixed, with no significant impact on the volume of capital inflows or currency appreciation. The only observable consistent effect, she says, is that controls can shift flows into financial instruments with longer maturities.
Controls, too, often hit small and medium-sized companies harder than big ones, and can therefore have serious implications for productivity and growth in countries that rely heavily on SMEs, as many emerging Asian nations do.
Ms Forbes believes the main weakness of capital controls is that market participants usually find a way around the regulations. That makes them better suited to dealing with a temporary crisis than a long-term shift in flows, which is what Asia€™s emerging nations are probably experiencing. "If the main benefit is longer maturities, this can be done in other ways," she says.
As the Fed turns on the taps, Thailand, for one, may need to think more creatively.
Additional reporting by Tim Johnston and Roel Landingin
Copyright The Financial Times Limited 2010
Thailand€™s capital controls
Published: October 12 2010 15:23
The Asian Development Bank, the International Monetary Fund and the United Nations are in broad agreement: capital controls are legitimate tools for governments facing investment inflows that threaten to unsettle their economies. But countries that actually impose them know better than anyone that they may not actually work.
Take Thailand. Bangkok€™s attempt in December 2006 to put sand in the wheels of international finance was famously bungled. The decision to require 30 per cent of all inflows to be deposited with the central bank for a year, without interest, was reversed a day later for equities, after the local stock market benchmark saw the biggest one-day drop in its history. But what is often forgotten was that the controls had little if any effect on the currency.
The baht continued to grind higher against the dollar, reaching a post-1997 high in March 2008. It was only in May that year €“ three months after the controls came off €“ that the baht embarked on a steady weakening trend.
The latest measures are more modest: a removal of the tax breaks received by foreign investors in domestic bonds.
But the basic aim is the same: to tame Asia€™s second-strongest currency, this year up 11 per cent against the dollar.
Finance minister Korn Chatikavanij seems to recognise, though, that with a trade surplus, a current-account surplus, and economic growth at a 15-year high, upward pressures will be hard to contain.
Widening interest-rate differentials with developed economies will only encourage speculative flows. And not all the inbound capital is €œhot€: foreign direct investment approvals from Europe, for example, were up five-fold between January and August. T
here is some value in signalling to foreign investors that currency appreciation won€™t be entirely unchecked. But fundamentally, resistance may be futile.
Copyright The Financial Times Limited 2010.
Published: October 12 2010 15:23
The Asian Development Bank, the International Monetary Fund and the United Nations are in broad agreement: capital controls are legitimate tools for governments facing investment inflows that threaten to unsettle their economies. But countries that actually impose them know better than anyone that they may not actually work.
Take Thailand. Bangkok€™s attempt in December 2006 to put sand in the wheels of international finance was famously bungled. The decision to require 30 per cent of all inflows to be deposited with the central bank for a year, without interest, was reversed a day later for equities, after the local stock market benchmark saw the biggest one-day drop in its history. But what is often forgotten was that the controls had little if any effect on the currency.
The baht continued to grind higher against the dollar, reaching a post-1997 high in March 2008. It was only in May that year €“ three months after the controls came off €“ that the baht embarked on a steady weakening trend.
The latest measures are more modest: a removal of the tax breaks received by foreign investors in domestic bonds.
But the basic aim is the same: to tame Asia€™s second-strongest currency, this year up 11 per cent against the dollar.
Finance minister Korn Chatikavanij seems to recognise, though, that with a trade surplus, a current-account surplus, and economic growth at a 15-year high, upward pressures will be hard to contain.
Widening interest-rate differentials with developed economies will only encourage speculative flows. And not all the inbound capital is €œhot€: foreign direct investment approvals from Europe, for example, were up five-fold between January and August. T
here is some value in signalling to foreign investors that currency appreciation won€™t be entirely unchecked. But fundamentally, resistance may be futile.
Copyright The Financial Times Limited 2010.
Comment