Agency warns on volatility of Asia-Pacific capital flow

By Kevin Chen  /  Staff reporter

Mon, Mar 11, 2013 - Page 14

Strong capital flows into the Asia-Pacific region this quarter triggered by advanced economies’ aggressive monetary easing have increased the pressure on policymakers in the region to act, an international ratings agency said.

However, an eventual exit by these funds could also endanger the stability of regional economies, Standard & Poor’s (S&P) said in a report on Wednesday.

“The volatility and management of these flows is, in our opinion, a risk for many economies in the region,” S&P analyst Fabienne Michaux said in the report titled Global Credit Conditions Underpin Economic Growth Outlook in Asia Pacific.

The analyst said the risks associated with capital flow volatility included “increasing the potential for significant currency revaluations, shifts in relative import and export flows and relative competitiveness, commodity price movements and raising the potential for asset and credit bubbles to form.”

Overall, S&P said the economic outlook for Asia-Pacific, which is susceptible to the slowdown in global trade and currency fluctuations, would either hold steady or slightly improve to expand by 5 percent this year compared with an estimated 4.7 percent growth for last year.

However, the adverse impacts associated with capital flow volatility would likely decrease regional economies’ growth by more than 2 percentage points in a worst-case scenario, it added.

The firm forecast 3.3 percent growth for Taiwan’s economy this year, adding that China’s economy could expand by 8 percent.

Meanwhile, S&P warned that hikes in property prices, much of which was caused by “easy monetary conditions” fostered by central banks across the globe, would bring additional risks to banking systems in many countries in the region.

“The low interest-rate environment and intense competition are squeezing banks’ loan margins, which may in turn constrain their revenues,” S&P analyst Ritesh Maheshwari said.