South-east Asian economies are now better equipped to withstand volatile capital flows, according to regional policymakers
South-east Asian nations are braced for volatile capital flows caused by problems in developed world economies – but policymakers insist they are strong enough to deal with them.
“We are seeing very significant surges in capital outflows and reversals,” Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, told Emerging Markets. “Previously it destabilized us quite significantly. But in the current environment these flows are better intermediated by emerging economies.”
In Indonesia, Rahmat Waluyanto, a debt management official at the Ministry of Finance, said the proportion of bonds under foreign ownership had fallen from 35.4% to 33.6% in the last week, but said net inflows into the government bond market stood at $5.5 billion year to date.
“There is no reversal yet: the real money accounts still stay,” he said. “We have the capacity to withstand flows.”
Around 20% of Malaysian government bonds are foreign-held. Emerging markets generally have been heavy recipients of foreign capital since the 2008 global financial crisis, but Asian nations have traditionally worried about the impact of sudden reversals during times of macroeconomic stress.
In 2009, deleveraging by international investors led to the withdrawal of large sums from Asian markets, particularly Korea and Malaysia. “Our currency depreciated to levels we haven’t seen for a long time, and our reserves declined by $25-30 billion,” Zeti said.
But both policymakers said their countries had specific reasons for being more resilient to capital flight this time. Zeti in Malaysia cited more resilient financial institutions, more developed financial markets, higher reserve levels and a more flexible exchange rate.
“The central bank also has a wider number of instruments to absorb them and to sterilize some inflows so they don’t lead to the formation of asset bubbles,” she said.
Waluyanto said Indonesia was protected by its large foreign exchange reserves – which passed $100 billion for the first time earlier this year – and a widening domestic investor base, the growth of pension funds and insurance, and a measure called the bond stabilization framework.
He said this involves strategies to anticipate negative impacts of sudden reversals, including buybacks of government securities by his office, the coordinated purchase of government securities by state-owned corporations, and using cash surpluses with the approval of parliament to buy into the market.
However Zeti said Malaysia is still not ready for full currency liberalization. Although foreign exchange in Malaysia has been partly liberalized, with no restrictions on inflows or outflows by residents and non-residents, the ringgit has not been internationalized in a way that would allow access to the currency in offshore markets.
“Our assessment is that the internationalization of the ringgit should not be hastened,” she said. “The benefits must outweigh the costs. In an environment of highly volatile global financial markets, opening the ringgit offshore market could increase the risk of significant disruptions in our domestic financial markets.”