Lessons from GFC for Management and Liberalization of ... · Lessons from GFC for Management and...
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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
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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
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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
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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
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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 (%)
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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)
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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)
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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
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-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
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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$)
2000-2007 2008
Gross Flows 677.3 159.2
in % of GDP 6.9 6.6
Gross Inflows 351.6 80.2
in % of GDP 3.6 3.3
Gross Outflows 325.7 79.0
in % of GDP 3.3 3.3
Net Inflows 25.9 1.2
in % of GDP 0.3 0.0
Capital Flows in Emerging Market Economies: a Comparison
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0.0
5.0
10.0
15.0
20.0
25.0
East Asian Economies
% of GDP % of M2
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Argentina Brazil Chile Costa Rica Venezuela, Rep. Bol.
Latin America
% of GDP % of M2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland
Central and Eastern Europe
% of GDP % of M2
Volatility of net flows is generally high and varies greatly across countries..
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5. Impact of Capital Flows
Rapid accumulation of foreign exchange reserves ….
0
500
1000
1500
2000
2500
3000
3500
4000
4500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Foreign Exchange Reserve Accumulation (in billion US$): 1990-2008
CAM HKG IND INO JPN KOR LAO MAL MYA PHI PRC SIN THA VIE
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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
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Ap
r-0
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Ju
l-0
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Oct-
05
Ja
n-0
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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
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Ap
r-0
8
Ju
l-0
8
Oct-
08
Ja
n-0
9
HKG
IND
INO
KOR
MAL
PHI
PRC
SIN
TAP
THA
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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
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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)
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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
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95
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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
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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…..
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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.
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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?
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• 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
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• 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
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• 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
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• 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:
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• 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: