Singapore/Seoul: 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 on Tuesday. 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,” vice-president B.N. Lohani said in a speech in Seoul on Tuesday. “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 International Monetary Fund last month voiced its support for taxes on capital inflows to help stem excessive appreciation in some Latin American currencies. A United Nations agency this month also touted similar measures, saying China, India, Singapore, Indonesia and South Korea are most at risk to short-term capital swings.
Net private capital inflows to Asia’s developing economies are expected to be $272.4 billion (Rs12.42 trillion) this year, compared with $282.9 billion in 2009, 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 had in November banned foreigners from parking their money in time-deposit accounts to counter speculation on its currency that may hurt exports. Brazil had in October 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% of stocks by value in Asia’s emerging markets. They owned 22.3% of local-currency government bonds in Indonesia, 13.3% in Malaysia and 3.9% in Thailand as of 31 March, the report said.
Stock markets in South Korea, India and Taiwan have so far this year attracted more than $14 billion from abroad, following net inflows of $57.7 billion in 2009, exchange data show. Most markets are no longer cheap, with valuations exceeding their five-year average, ADB said.