Foreign banks see higher capital inflows in Asia
Hong Kong-based economist Frederic Neumann said the prevailing risk aversion has so far tamed the inflow of capital into Asian emerging markets but this would not last long once there is a clearer picture of the US economy.
Neumann, who is head of the Asian Economic Team at HSBC, said that so far, the US Fed’s action has had little effect on regional capital flows, because the US central bank’s rate cuts were overlaid with a bout of global risk aversion.
“[This dampens] any carry trade-type effects that could otherwise be expected to ensue given the large interest rate differential between emerging markets, such as the Philippines, and dollar rates,” Neumann said .
“However, once risk aversion eases in the coming months, more significant capital inflows into Asian emerging markets should be expected,” he pointed out.
According to Neumann, this adds an inflationary dimension to the rate cuts of the US Fed, particularly since Asian economies appear exposed to another wave of liquidity on the back of Fed cuts.
“We already have a bit of an inflation scare in Asia, with headline readings across the region surprising on the upside over the last few months,” Neumann said.
According to Neumann, this in part reflected what he characterized as an “overly loose monetary policy” in the region.
Neumann said Asian central banks are unable or at least unwilling to tighten monetary conditions as long as the Fed is on an easing path.
“This represents a fundamental policy dilemma for Asia,” Neumann said. “Sooner or later, however, either inflation will have to ease, possibly due to the dampening effect of the US slowdown, or Asian central bank’s will have to tighten more aggressively, seeing their currencies rise in the process.”
Monetary officials have already expressed concern over “imported inflation” and said the Bangko Sentral ng Pilipinas (BSP) was prepared to adjust its Special Deposit Account (SDA) facility should it become necessary.
The central bank earlier closed three of its six SDA windows, saying that the projected inflation for 2008 and 2009 were within its target and the economy needed the liquidity.
Despite rising oil prices, the BSP said the country’s inflation rate would taper off in the second half of the year as global economy slows down and demand for oil declines.
However, monetary officials admitted that 2008 averages would be higher than 2007 when the national average inflation rate was recorded at 2.8 percent.
BSP Governor Amando M. Tetangco said over the weekend that while monthly inflation rate might occasionally surge, the average would be lower in the second semester.
The BSP has already made tentative moves to release funds parked in its SDA facility but according to Tetangco, the move would merely supply more funds that the system needed so that the net effect would not cause inflationary surges.
According to Tetangco, however, the SDA would stay in the BSP’s “monetary policy toolkit”.
“Should a situation unfold that warrants another fine-tuning of the SDA, we would consider that at that point,” he said. “In fact, the BSP charter provides the BSP leeway to adopt remedial measures, outside of the standard open market operations, to effectively address any liquidity, credit or price concerns.”
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