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ADB urges foreign reserve spending

Asia's emerging economies should spend some of their huge foreign exchange reserves to improve the lives of their people and underpin future growth, the Asian Development Bank's (ADB) chief economist said yesterday.

Asian finance ministers meeting today will discuss ways to further bolster their defenses against a possible repeat of the 1997 regional financial crisis by improving their system of currency swaps.

But ADB chief economist Ifzal Ali said that guarding against possible speculative attacks on currencies should no longer be the priority.

"The challenge facing Asia is in fact too much reserves and the long term negative effects of this," he said in an interview ahead of the ADB's annual meeting in Kyoto, Japan this weekend.

"While it is not as dramatic as a crisis, over time it does eat away at opportunities for higher rates of growth, higher investments. This is particularly true for the Southeast Asian countries where investment never recovered to pre-crisis days," he said.

Developing Asia should now be considering "investing in the countries, the people, the environment, energy [and] infrastructure so that there is a better tomorrow for everybody," he added.

The ADB estimates that developing Asia's foreign exchange reserves are together worth almost US$2.3 trillion.

Ali said some of the reserves -- which are believed to be invested mostly in US-dollar instruments -- could be channeled into higher yielding assets or spent on infrastructure or other worthwhile projects.

One country that already has a policy of actively managing its reserves is Singapore, which set up an investment management company in 1981.

But better returns would not improve standards of living unless the money was actually spent, Ali said.

"What is happening now with the build up of reserves is that if you export for the sake of exports, the people living in these countries don't benefit. In the long term that is what has to be really the focus of attention," he said.

Ali said the outlook for the Asian economies was generally upbeat although the US economy seems to be cooling more than expected.

"From the US it seems that there is going to be a sharper slowdown than had been anticipated. The US housing market problem seems to be more acute than had been anticipated," he said.

"Particularly, the early signs that there would be no contagion from the `subprime' mortgage market probably was over-optimistic," Ali said, referring to failures in mortgages held by people with below-average credit histories.

Meanwhile, the head of the ADB said on Friday Asia must step up financial cooperation to cope with large capital inflows that are putting the squeeze on the region's most open economies.

Many Asian nations are seeing an appreciation of their currencies as low interest rates in countries such as Japan and Switzerland encourage investors to borrow cheaply there to invest in fast-growing developing economies.

"Small open economies in Asia like Thailand or Malaysia, certainly their economies are affected by a large inflow of capital from outside," ADB president Haruhiko Kuroda said ahead of the bank's annual meeting in Kyoto.

"This is a real challenge for any small, open economy. One way [to cope] is financial cooperation among small open economies to mitigate the impact of fluctuations of capital flows," he said.

Kuroda also urged China to embrace further currency flexibility to allow an appreciation of the yuan.

"I think the Chinese authorities have made the currency gradually more flexible and I think this trend would and should continue. Greater exchange rate flexibility would be in the interest of the Chinese economy," he said.
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