The Asian Development Bank (ADB) circa Nov 25 has raised red flags that Southeast Asian countries may suffer asset bubbles if hot money continues to flow in.The Business Times Singapore reported that Noritaka Akamatsu, senior adviser at ADB’s Office of Regional Economic Integration, has said that some regional governments are thinking of limiting capital inflows in the “short-term, liquid side of the market”. This could destabilise financial systems.
“They are clear about the benefits of long-term inflows such as foreign direct investments, but there is concern about the short-term money,” he said.
Last week, Indonesia’s central bank said that it was “studying” possible limits on foreign ownership of short-term debt but has no plans for controls on capital or the currency.
Meanwhile, within Asia, the South Korean government plans to hold talks on what can be done to handle inflows financed with cheap US-dollar loans — the so-called carry trades.
The strong inflows into the region result partly from the yield differential between Asian economies and Western markets. The US has slashed its benchmark rate to near zero, and it is not clear if there will be a rate rise soon.
As a result, global investors seeking higher returns on their money are parking capital in regional assets — and driving up regional currencies against the greenback.
Akamatsu warned that the stronger currencies may crimp Asian exports growth to the West, as most South-east Asian economies are still run on export-oriented growth models.
To sterilise the effect on currency values, central banks typically raise the supply of domestic units, but this can potentially fuel domestic inflation.
And if central banks mop up the added liquidity in their systems by selling government bonds, this may leave them with higher debt on their books, and raises concerns about whether central banks are sufficiently capitalised to take on higher interest expenses.
Akamatsu also said yesterday that the ADB was working with the Chinese authorities to issue a yuan-denominated “panda bond” — a second tranche since 2005.
The money would be used to finance development projects in China, but he declined to disclose the amount or the timing of the issue, citing price sensitivity.
According to ADB’s Asia Bond Monitor, East Asia’s local-currency bond markets grew 15 per cent in the third quarter of 2009 from a year earlier, as governments and corporations took advantage of lower interest rates to fund spending.
So will Malaysian assets and stocks go up soon on this "hot air" money?
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