1

Lessons from GFC for

Management and Liberalization

of Capital Flows in Asia Mario B. Lamberte

Director of Research

This draws largely on Chapter 1 of the forthcoming book,

Managing Capital Flows: Search for a Framework,

edited by Masahiro Kawai and Mario B. Lamberte

2

Outline

1. Introduction

2. Economic characteristics of Asian economies

3. Openness of the economies

4. Patterns of capital flows

5. Impacts of capital inflows

6. Policy responses of Asian economies

7. Policy issues

3

1. Introduction

• Types of risks arising from surges in capital inflows:

macroeconomic risks

financial instability

sudden and massive capital flow reversal

• Asian economies experienced surges in capital inflows up until the onset of the global financial and economic crisis

• With the global economic turmoil subsiding, there are signs that

capital of a largely short-term nature is returning to Asia in a

significant way raising serious concern among policymakers in the

region

• following Brazil’s move, Taipei,China has recently imposed capital

controls to limit speculative capital inflows

• These recent developments suggest that managing capital inflows

remains an important policy issue for many emerging market

economies

4

2. Some economic characteristics of emerging Asian economies…

Economies

GDP Growth Current Account Investment Ratio

(in %) (as % of GDP) (as % of GDP)

1990-1996

2000-

2007 2008

1990-

1996

2000-

2007 2008

1990-

1996

2000-

2007 2008

Cambodia (CAM) 5.8 9.5 6.7 -5.0 -4.1 -10.2 10.8 18.5 0.0

China, People's Republic

(PRC) 10.7 10.1 9.0 1.1 4.8 9.8 31.2 38.9 42.0

Hong Kong, China (HKG) 4.6 5.3 2.4 9.3 14.2 28.2 22.5 19.7

India (IND) 5.8 7.3 6.7 -1.3 -0.1 -3.0 22.6 27.6 34.8

Indonesia (INO) 7.5 5.0 6.1 -2.5 2.8 0.1 27.9 21.5 27.6

Korea (KOR) 7.9 5.2 2.2 -1.6 1.8 -0.7 37.3 29.0 29.3

Lao PDR (LAO) 6.5 6.7 7.8 -14.3 -2.3 0.0 28.5 0.0

Malaysia (MAL) 9.5 5.6 4.6 -5.5 11.8 17.6 38.7 22.5 19.6

Myanmar (MYA) 5.5 8.0 0.0 -0.6 0.0 0.0 13.2 0.0 0.0

Philippines (PHI) 2.8 5.0 3.8 -4.0 0.9 2.3 22.4 16.6 14.8

Singapore (SIN) 8.8 6.0 1.1 12.4 17.6 14.9 34.5 25.1 28.5

Taipei,China (TAP) 6.9 4.1 0.1 7.1 6.4 20.3 21.2

Thailand (THA) 8.6 5.0 2.9 -7.0 2.9 0.0 40.4 25.3 27.3

Viet Nam (VIE) 7.9 7.6 6.2 -8.4 -1.8 -11.8 20.2 32.4 36.0

Source: IFS, WDI, national statistics

5

3a. Openness of the Asian Economies: Trade in Goods

and Services

Openness (HKR, MAL, SIN - on right scale, all other countries - on left scale)

CAM

PRC

IND

INO

KOR

LAO

PHI

TAP

THA

VIE

HKG

MAL

SIN

0

20

40

60

80

100

120

140

160

180

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

50

100

150

200

250

300

350

400

450

500

CAM

PRC

IND

INO

KOR

LAO

PHI

TAP

THA

VIE

HKG

MAL

SIN

Figure 1. Ratio of Total Exports and Imports of Goods

and Services to GDP (%)

6

3b. Openness of the Capital Account

-2 -1 0 1 2 3

SIN

HKG

INDO

CAM

PHI

KOR

THA

MAL

IND

LAO

PRC

VIE

MYA

Figure 2. Degree of Openness of the Capital Account: de jure

(Chinn-Ito Index)

7

Capital Account Openness: de facto

Ratio of Total Stock of Assets and Liabilities to GDP

(In %)

CAM (left scale)

IND (left scale)

INO (left scale)

KOR (left scale)

PHI (left scale)

PRC (left scale)

THA (left scale) VIE (left scale)

TAP (right scale)

LAO (right scale)MAL (right scale)

HKG (right scale)

SIN (right scale)

0

50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

250

500

750

1000

1250

1500

CAM (left scale) IND (left scale) INO (left scale) KOR (left scale) PHI (left scale)PRC (left scale) THA (left scale) VIE (left scale) TAP (right scale) LAO (right scale)MAL (right scale) HKG (right scale) SIN (right scale)

8

4. Patterns of Capital Flows

• Capital inflows increasing since 2001, but

dropped sharply in 2008 although share of FDI has remained high, however,

share of portfolio has been increasing fast

bank financing rose sharply in 2007-08 with Korea accounting for two-thirds of the total

• Capital outflows also increasing up until 2008, led by PRC, Singapore and Korea Portfolio investment outflows have the largest share

• As a whole, capital flows in Asia has become increasingly symmetric

9

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2000 2001 2002 2003 2004 2005 2006 2007 2008

Capital Flows: Emerging Asian Economies, % of GDP

Gross capital flows Gross capital inflows

Gross capital outflows Net inflows

10

Capital Flows in Emerging Asia, 2000-2008 (in billion US$)

2000-2007 2008

Gross Flows 4743.1 237.2

in % of GDP 10.0 2.8

Gross Inflows 2624.1 111.2

in % of GDP 5.5 1.3

Gross Outflows 2119.0 126.0

in % of GDP 4.5 1.5

Net Inflows 505.1 -14.8

in % of GDP 1.1 -0.2

Capital Flows in Emerging Europe, 2000-2008 (in billion

US$)

2000-2007 2008

Gross Flows 789.1 182.0

in % of GDP 18.7 17.3

Gross Inflows 553.0 139.2

in % of GDP 13.1 13.2

Gross Outflows 236.1 42.8

in % of GDP 5.6 4.1

Net Inflows 316.8 96.4

in % of GDP 7.5 9.2

Capital Flows in Emerging Latin America 2000-2008 (in

billion US$)

2000-2007 2008

Gross Flows 677.3 159.2

in % of GDP 6.9 6.6

Gross Inflows 351.6 80.2

in % of GDP 3.6 3.3

Gross Outflows 325.7 79.0

in % of GDP 3.3 3.3

Net Inflows 25.9 1.2

in % of GDP 0.3 0.0

Capital Flows in Emerging Market Economies: a Comparison

11

0.0

5.0

10.0

15.0

20.0

25.0

East Asian Economies

% of GDP % of M2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Argentina Brazil Chile Costa Rica Venezuela, Rep. Bol.

Latin America

% of GDP % of M2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland

Central and Eastern Europe

% of GDP % of M2

Volatility of net flows is generally high and varies greatly across countries..

12

5. Impact of Capital Flows

Rapid accumulation of foreign exchange reserves ….

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Foreign Exchange Reserve Accumulation (in billion US$): 1990-2008

CAM HKG IND INO JPN KOR LAO MAL MYA PHI PRC SIN THA VIE

13

Real Effective Exchange Rates (Jan. 2000 = 100)

Most currencies in the region had appreciated in real terms,

up until the global credit crunch, and showed some rebound in recent

months for most countries….

40

60

80

100

120

140

160

Ja

n-0

0

Ap

r-0

0

Ju

l-0

0

Oct-

00

Ja

n-0

1

Ap

r-0

1

Ju

l-0

1

Oct-

01

Ja

n-0

2

Ap

r-0

2

Ju

l-0

2

Oct-

02

Ja

n-0

3

Ap

r-0

3

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

HKG

IND

INO

KOR

MAL

PHI

PRC

SIN

TAP

THA

14

Money supply growth rates had been generally low and stable after

the financial crisis, but tended to rise in most recent years…

Figure 16: Growth Rates of Money Supply (%)

CAMINO

LAO

MYAPRC

VIE

-20

0

20

40

60

80

100

120

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

CAM

HKG

IND

INO

KOR

LAO

MAL

MYA

PHI

PRC

SIN

TAP

THA

VIE

15

Equity prices increased markedly since 2003 up until recently as foreign

portfolio investors made substantial withdrawal of their funds due to

the deepening of the subprime loan crisis and risk increases

in global equity markets, but have rebounded in recent months …

Equity Prices, Jan 2000-August 2008

0

50

100

150

200

250

300

350

400

450

500

2000M

1

2000M

9

2001M

5

2002M

1

2002M

9

2003M

5

2004M

1

2004M

9

2005M

5

2006M

1

2006M

9

2007M

5

2008M

1

2008M

9

2009M

5

INO

MAL

PHI

SIN

THA

0

50

100

150

200

250

300

350

400

450

2000M

1

2000M

9

2001M

5

2002M

1

2002M

9

2003M

5

2004M

1

2004M

9

2005M

5

2006M

1

2006M

9

2007M

5

2008M

1

2008M

9

2009M

5

HKG

IND

KOR

PRC

TAP

Indonesia: Residential Property Price Index, 2002-2007

80

90

100

110

120

130

140

150

160

Mar

June

Sep

Dec

Mar

June

Sep

Dec

Mar

June

Sep

Dec

Mar

June

Sep

Dec

Mar

June

Sep

Dec

Mar

June

Sep

1999=100

Land Price Index of Seoul Metro Area

Real estate prices

rising rapidly during

surges in

capital inflow…

(Note: hard to get data

on real estate prices)

17

Inflation rates were generally low after the Asian financial

crisis but have tended to rise for some countries in recent

years up until 2008…

Inflation Rates

CAM

HKG INDKOR

MAL

PHI

PRC

SINTAP

THA

INO

LAO

VIE-10

-5

0

5

10

15

20

25

30

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

0

20

40

60

80

100

120

140

CAM

HKG

IND

KOR

MAL

PHI

PRC

SIN

TAP

THA

INO

LAO

MYA

VIE

18

6. Policy Responses of Asian Economies during

Surges in Capital Inflows

Countries Sterilized Forex Market Intervention: Instruments

PRC PBC initially sold T-bonds and later replaced them with its own Central Bank Bills (CBB). Adjusts reserve requirement ratio

India RBI sells regular government bonds and special bonds under the Market Stabilization Scheme. Adjusts reserve requirement ratio.

Indonesia BI sells government bonds and central bank certificates.

Korea BOK uses Monetary Stabilization Bonds while the Ministry of Finance issues treasury bills and deposits proceeds with the BOK.

Malaysia BNM Sells securities in the conduct of its open market operation.

Philippines BSP sells government securities and has opened a special deposit accounts facility. Adjusts reserve requirement ratios.

Singapore MAS carries out intervention in the foreign exchange market to directly influence the value of the currency and defend the band.

Thailand BOT sells government bonds. Recently sold US dollars in the forward market.

Viet Nam SBV sells T-bills and central bank bills. Adjusts reserve requirement ratios.

6.1. Intervention in the Forex Markets…..

19

6.2. Capital Controls

imposition of new (fine-tuning) capital controls to

slow down inflows

but general tendency – liberalization of the capital

account

easing of controls on outflows

Observations: speculative capital inflows slipped

through different legitimate channels such as trade

accounts, FDI and investment account as well as

illegitimate channels.

20

7. Policy Issues

• The question: In the post-crisis period, will Asia face again a surge in capital inflows? [liquidity from further monetary easing in US and Europe] Asia is currently leading the economic recovery

Emerging economies in CEE still facing huge task of stabilizing their economies and repairing their financial systems

• Policy Issues: Of the measures tried before, which can be applied again?

What other domestic policy options should be tried?

Is there scope for global solutions?

What is the role of regional cooperation?

21

• Sterilized intervention and reserve accumulation:

even though there is no optimal level of

reserves, the current forex reserves in Asia

seem to have exceeded the level needed for

mitigating abrupt capital reversals or external

financing crisis

scope for reserve-sharing arrangement

7.1. Doing More of what has been tried before

22

• Strengthening national financial markets– need to accelerate regulatory and supervisory reforms

• Controls on capital inflows:

recent trends - moving away from administrative controls to market-based controls (e.g., tax on inflows)

evidence on effectiveness of controls on inflows is mixed

For countries that have already substantially liberalized capital account, administrative controls are no longer a viable option

For countries that have still substantially closed capital account, properly sequenced liberalization is called for

23

• Fiscal policy – automatic stabilizer function of the budget

• Rebalancing growth – stimulating domestic private investment in some countries and private consumption in other countries

• Easing restrictions on capital outflows

effectiveness in the short run

could attract more capital inflows

7.2. Exploring other options

24

• So far, mainly focused on transparency as a way to minimize volatility of capital (e.g., ROSC, SDDS)

• Another view: incidence of crises has not declined despite the increase in transparency

• Possibility of including countercyclical element in the regulation of financial intermediation and capital flows

7.3. Scope for Collective Actions

Global solutions:

25

• Exchange rate cooperation

• Regional financial market surveillance and

integration – “Asian Financial Stability Dialogue”

• Effective regional reserve pooling arrangement

(CMIM)

• Capacity building: ensures a supply of well-

trained regulators and bankers

Role of Regional Cooperation:

26

Thank you very much!

www.adbi.org