| Asian Central banks warn against capital inflow risks |
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| World Affairs Talk | |
| Tuesday, 08 May 2007 | |
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The governors attending a conference to mark the 10th anniversary of the region's currency crisis also noted their success in getting the economy on a sound footing and strengthening the financial system since the end of the crisis, during which a flight of foreign capital sent Asian currencies tumbling in 1997/98. The foreign exchange and financial markets are much more stable now and the currencies sometimes face upward rather than downward pressure. But with the globalisation of the world's financial markets, large capital flows will continue to have a strong impact on the open economies. Bank of Thailand Governor Tarisa Watanagase, who also faced turmoil in Thai markets late last year, expressed caution about rapid moves in capital flows. The Bank of Thailand implemented capital controls to restrain the Baht's rise in December but made an abrupt partial reversal of the decision later after the move alarmed foreign investors, triggering a near 15 percent plunge in the stock market. “Rapid movements of capital flows have caused exchange rates to be vastly out of line with the underlying economic fundamentals and have negative impacts on the export or the import sectors,” Tarisa said. “The recent surge in capital inflows has caused a one-way appreciation of the Baht relative to regional currencies” that is detrimental to the nation's export competitiveness, she added. Philippine Central Bank Governor Amando Tetangco said foreign investment in the Philippines has risen significantly because of an improved macroeconomic environment, prompting a sharp increase in capital inflows that is challenging current economic policies. Potential risks include an appreciation in the domestic currency that could hurt the nation's exports, he said. The dramatic growth in capital inflows could also affect the nation's inflation outlook, he added. “We remain watchful of potential risks of sustained acceleration of liquidity with the view to acting pre-emotively to address threats to price stability,” Tetangco said. The head of the International Monetary Fund (IMF), speaking at the symposium, said sharp capital inflows can be disturbing at certain times in any economy. IMF Managing Director Rodrigo Rato added that several steps can be useful in coping with the associated risks, including strengthening Asian financial systems and deepening regional financial integration. In a report on Asia's economic outlook released last September, the IMF said net private capital flows to Asia could increase to $88 billion in 2006 from $60 billion in 2005. But the report said portfolio flows would moderate as investors expect Asian monetary tightening to end soon and spreads between Asian and U.S. interest rates to remain near zero well into 2007. Rato said greater flexibility in China's exchange rate system will also help Asian economies cope with potential risks posed by sharp capital inflows. “We think the movement we've seen in the (Chinese) currency in recent months, and the recognition by the authorities that not only nominal but also effective exchange rates have to be considered, are steps in the right direction,” Rato said. The Yen has gradually gained against the dollar since it was unhooked from a dollar peg in July 2005. It appears that ten years after the currency crisis, everything is different. New strategies with new outlook are required and all the Central Banks of the region are ready for it. It is, and will surely be, the most difficult task for any monetary authorities to maintain the stability of foreign exchange rates, the free flow of capital and the independence of monetary policy simultaneously. Share & Bookmark             |
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