Asian countries may benefit from capital controls to help limit inflows that pose a risk to their economies and financial systems, according to the Asian Development Bank (ADB).
Authorities should consider “the full array of policy measures available in their toolkit,” the Manila-based lender said in a report published yesterday. The Asia Capital Markets Monitor recommended “temporary and targeted” restraints on incoming investment in addition to encouraging outflows.
“Volatile capital flows pose a significant risk, affecting both macroeconomic management and overall financial stability,” ADB vice president B.N. Lohani said in a speech in Seoul yesterday. “The return of capital flows is welcome. But large and sudden capital movements can put the sustainability of economic recovery at risk.”
The recommendation comes after the IMF last month voiced its support for taxes on capital inflows to help stem excessive appreciation in some Latin American currencies. A UN agency this month also touted similar measures, saying China, India, Singapore, Indonesia and South Korea are most at risk to short-term capital swings.
Demand for higher-yielding assets in Asia has helped drive gains of more than 25 percent for Indonesia’s rupiah and South Korea’s won since the start of December 2008, the month the US Federal Reserve cut its benchmark interest rate to near zero.
The MSCI Asia Pacific Index of equities has risen 40.7 percent over the same period while government bonds gained 22 percent, based on HSBC Holdings PLC’s composite index of 10 Asian markets.
Net private capital inflows to Asia’s developing economies are expected to be US$272.4 billion this year, compared with US$282.9 billion last year, ADB said, citing a forecast by the Washington-based Institute of International Finance. The amount of money pouring into the region may strengthen as central banks from India to Malaysia start raising borrowing costs to fight inflation, widening the interest-rate differential with the US, Europe and Japan, ADB said.
Taiwan in November last year banned foreigners from parking their money in time-deposit accounts to counter speculation on its currency that may hurt exports. Brazil the month before slapped a levy on foreign purchases of stocks and bonds in a bid to restrain the real’s appreciation.
ADB estimates that foreign funds hold about 20 percent of stocks by value in Asia’s emerging markets. They owned 22.3 percent of local-currency government bonds in Indonesia, 13.3 percent in Malaysia and 3.9 percent in Thailand as of March 31, the report said.
South Korean deputy finance minister Yim Jong-yong said at a forum in Seoul yesterday that emerging economies should move to rein a surge in inflows of foreign-currency capitals that may pose a risk to their economies.
“Globally coordinated measures to stem volatile capital market moves will end the vicious cycle of foreign-exchange reserves build-up and worsening global imbalances,” Yim said.
South Korea can consider measures to levy taxes on short-term foreign capital inflows and tighten the regulations on local financial firms’ short-term external borrowings, Park Cyn-young, principal economist at the ADB, told reporters in Seoul.
Stock markets in Taiwan, South Korea and India have so far this year attracted more than US$14 billion from abroad, following net inflows of US$57.7 billion last year, exchange data show.
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