Wednesday, October 27, 2010

Asian central banks warn of risks from capital surge

SINGAPORE; Singapore's central bank said on Wednesday, Oct 27 that Asia was facing higher risks from a surge of capital inflows, a tide that could reverse in a disorderly fashion if inflationary pressures were not contained.

The Monetary Authority of Singapore (MAS) issued the warning in its latest macroeconomic review, echoing concerns expressed by policymakers in many emerging economies over hot money inflows that are pushing up regional currencies, stocks and other assets such as property.

The Bank of Korea's chief said on Wednesday that taxes on foreign bond investors may be re-considered, while India's central bank said managing exchange rates in the face of volatile flows contained a cost.

Many emerging economies are concerned that the rush of speculative inflows in recent months could create potentially destabilising asset bubbles, making policymaking more difficult.

The surge of money into such economies, which is being partially fueled by a weakening U.S. dollar, is also pushing up many regional currencies, denting their export competitiveness and threatening to stifle their economic recoveries.

"An upsurge in inflationary pressures that leads to a disorderly reversal of flows could occur if regional economies are not able to intermediate these flows efficiently," the MAS said.

For a list of recent measures taken by other government around the world to control the impact of hot money inflows, see [ID:nSGE69503F]

The World Bank warned last week that capital flows posed a rise to East Asian economies and said authorities needed to be careful not to repeat the mistakes of the Asian financial crisis more than a decade ago. [ID:nTOE69I02D]

Analysts agreed.

"If you draw in large amounts of capital there is a risk that hot money could flow out," said Leong Wai Ho at Barclays Capital. "But whether that warrants putting up walls to block hot money coming in, the jury is still out on that."

He said in Singapore's case, the MAS' recent move to allow exchange rate appreciation was relieving some of the pressure from rising flows, while other macroeconomic and prudential policies were tackling asset inflation.

DBS bank said in a research report on Tuesday that Asia's foreign exchange reserves have been growing at a rate of $2.3 billion a day since April 2009, faster than at any time in history.

David Carbon, head of economic and currency research at the bank, said currency appreciation and capital controls would be among the ways Asia could tackle these inflows.

"Will it all end in tears? That seems unlikely," Carbon noted. "If Asia's policymakers have any fault, it is that they are too afraid of revisiting the 1990s."


Singapore's central bank said banks, companies and households are in a healthy position in Asia, but it was closely monitoring credit and asset markets.

MAS also said the risks of another round of financial contagion arising from sovereign defaults and a sharper-than-expected economic downturn in the developed economies had ebbed somewhat.

The MAS -- which tightened monetary policy further this month by widening the trading band for the Singapore dollar -- said inflation in the city-state would remain high until the first half of 2011 before moderating.

Singapore's economy will hit a slow patch in the immediate quarters ahead due to a fragile global economy before recovering in 2011 on strong Asian growth prospects, as well as continued expansion in financial services and tourism, the MAS said.

Despite the impending slowdown, the economy will grow at by 13 percent to 15 percent in 2010, the fastest annual growth ever, and would expand at a more sustainable pace in 2011, it said.

The services sector could account for two-third of gross domestic product in 2011, up from 50 percent this year, fueled by the opening of two casino-complexes. - Reuters

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