The Reserve Bank of India’s response to rising inflation was to mop up excess liquidity from the system. But apparently, the Indian central bank is not the only one worried about too much money floating around.
A decade after an exodus of capital triggered a financial crisis and pummelled their economies, Southeast Asian ministers this week will discuss ways to combat inflows that are threatening their monetary stability again.
“The flow of hot money into these economies is a major concern because the liquidity is affecting currencies and monetary policy management,” Robert Prior-Wandesforde, an economist at HSBC Holdings Plc. in Singapore, said of this week’s meeting of finance officials from the Association of Southeast Asian Nations (Asean) and representatives from Japan, China and South Korea in Chiangmai, Thailand.
At last year’s meeting, finance ministers set out four priorities to strengthen regional cooperation. They included developing an Asean asset class; liberalization in financial services; strengthening capacity-building initiatives and improving infrastructure financing to boost growth potential.
The task force appointed to research the framework, mechanisms and instruments for infrastructure funding have presented their report and a working group will explore the subject further, said Suparut Kawatkul, the Thai finance ministry’s permanent secretary, in an interview at the sidelines of the meeting.
Asia needs about $3 trillion of investment for infrastructure development over the next 10 years, Asian Development Bank (ADB) president Haruhiko Kuroda told East Asian leaders in January.
Inadequate electricity, telecommunications, water and transportation networks are pushing up the cost of doing business in the region and may make it lose its competitive edge.
Southeast Asian nations have lagged behind Indian and China in attracting foreign direct investments. Investing in higher-yielding assets would boost earnings that can be ploughed back into the region’s economies to improve infrastructure for their 567 million people.
Government and business spending in Japan, China and India remained the biggest in Asia Pacific in 2006, according to credit card firm Visa International Inc. Expenditure by governments and companies rose to $11.4 trillion, a 5% increase from the year before, the Visa Commercial Consumption Expenditure index showed.
Still, signs of a pick-up in spending are encouraging. While the biggest expenditures were recorded in the region’s largest economies, growth was fastest in countries including Indonesia, the Philippines, Vietnam and Thailand, the Visa index showed.
Asean ministers should also introduce measures for more open capital markets and make it easier to invest in member countries as the group moves towards creating a single union by 2015 to help it compete against China and India, analysts say.
“The economies are all at different stages of development, with some speeding ahead and the others still at the side of the road,” said Song Seng Wun, regional economist at CIMB-GK Securities Pte in Singapore. “They have quite some ways to go before they can be financially integrated.”
One way to quicken development and spending in Asean would be through better management of the 10-member grouping’s approximately $370 billion of currency reserves, economists say. In Asia, excluding Japan, nations have about $2.3 trillion of such holdings, over 40% of the total globally. China’s swelled to more than $1 trillion last year, while Thailand, Indonesia and the Philippines have seen theirs increase by over a fifth in 2006.
The accumulation of such assets is more than what those nations need for precautionary measures and there is little value in increasing the holdings, according to a US Treasury study published last week.
Asean’s deputy finance and central bank executives will discuss the large reserves with officials from Japan, South Korea and China tomorrow, while finance ministers will talk about it with their counterparts in May, Suparut said.
“Solutions are available if the political will is there,” said Surinder Kathpalia, managing director at Standard & Poor’s in Singapore.