Nha Trang, Vietnam: Southeast Asian nations may need to manage excessive short-term capital inflows to avoid destabilizing the region’s economic recovery, the International Monetary Fund (IMF) said.
Economies in the region may need measures against asset-price bubbles, Naoyuki Shinohara, an IMF deputy managing director, said at a press conference today in Nha Trang, Vietnam. Economic growth in the region may be 5.5% in 2010, he said.
“Capital inflow is something that should be welcomed, but there are cases when excessive short-term capital flow could disturb sound economic management,” Shinohara said. Management options include fiscal tightening, exchange-rate flexibility, and reserve accumulation, he said.
Asian equities and currencies have climbed this year as the region’s economic recovery draws funds to its assets, and policymakers from Malaysia to China have started withdrawing monetary stimulus to avert asset bubbles. Indonesia’s stocks are in a bubble and officials are prepared to put controls on capital inflows if needed, a central bank official said on Wednesday.
Capital inflows are returning to the region and policymakers are cognizant of the risks that such funds bring, finance ministers from the Association of Southeast Asian Nations said in a statement on Thursday in Nha Trang, where they gathered this week.
Their final statement excluded remarks that currency flexibility may be needed to minimize the risk of such inflows, which was included in an earlier draft seen by Bloomberg News.
Global capital flows are likely to improve from last year’s lows as the world economy recovers, the World Bank said in a report released on Wednesday. The Washington-based lender said East Asia may get a larger share of the increase in capital inflows this year. The global equity rally has added more than $2.2 trillion (Rs98.34 trillion) to the value of stocks this year.
Asian Development Bank president Haruhiko Kuroda said the return of capital flows to Asia is a risk for the region.
“It is critical to carefully manage capital flows to the region to ward off potential asset bubbles,” Kuroda told the finance ministers on Thursday. “Each country will have to choose its own appropriate policy mix of currency flexibility, a clear and stable monetary and fiscal policy, enhanced regulatory and supervisory efforts and even temporary capital controls.”
The MSCI Asia Pacific Index has risen 5.9% this year as stock markets in Indonesia, Thailand, Malaysia and Vietnam gained.
Indonesia’s stock prices are exceeding the fundamental value, Perry Warjiyo, the head of the central bank’s economic research and monetary policy division, said in an interview on Wednesday. While the bank is confident Indonesia can cope for now, a study on the feasibility of imposing capital controls has some measures that can be used to slow capital flows on a temporary basis if the market behaves irrationally, he said.
Malaysia, India and Vietnam are among Asian nations that have raised interest rates to avert asset bubbles and fight inflation.
China has asked banks to set aside more money as reserves to reduce liquidity in the financial system.
“Carefully designed capital controls could also be part of the appropriate response in certain limited circumstances, but these are exceptional measures,” Shinohara said.
South-East Asian economies have no plans to impose capital controls to regulate the flow of funds into the region, even as its markets attract strong interest from investors, Singapore finance minister Tharman Shanmugaratnam said after the Asean ministers’ meeting on Thursday.
Aloysius Unditu, Chris Anstey and Giang Nguyen contributed to this story.