Catalog

	Table of Contents
p. 10 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Developing Asia and the Pacific: Performance and Prospects Prospects for the World Economy in 2006-2007 Outlook for major economies World trade and commodity prices Capital flows and markets Subregional Summaries Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers The Doha Development Agenda: Asian Challenges and Prospects after the Ministerial Meeting in Hong Kong, China II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006 : I. Developing Asia and the World : Prospects for the World Economy in 2006-2007

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Capital flows and markets

Net private foreign equity flows to emerging Asia continue to grow steadily (Figure 1.2.9). While foreign direct investment in Asia has remained fairly constant in dollar terms since the Asian financial crisis, portfolio investments have increased significantly, rising from 8% of net equity flows at the end of the crisis in 1998, to 39% in 2005. Meanwhile, flows of credit to the region, particularly those routed through banks, are recovering from negative levels in 1998, but have been fitful of late. Consequently, when compared to precrisis financing, a shift from credit to equity financing can be seen. Figure 1.2.10 shows that the risk spreads on both Asian and all emerging market debt fell in 2005. Each of these trends is consistent with a resurgence of foreign confidence in Asian markets, and in emerging markets generally.

Credit flows in recent years have moved in sync with world interest rate differentials. In 2004, net foreign credit flows to Asia surged in response to low interest rates in the US, and perhaps as a result of speculation that some Asian currencies would appreciate. In 2005, as US interest rates rose and relevant Asian central banks' currency positions were clarified, these credit flows reversed somewhat. However, the reduction in net foreign credit to Asia was outweighed by strong foreign investment in Asian equities, and aggregate capital flows to Asia were positive in 2005.

Figure 1.2.11 shows that most Asian currencies have appreciated relative to the dollar. The demand for Asian currency is being supported by capital and current account trends, with both contributing to increases in foreign exchange holdings. If the payments imbalances that underpin these movements unravel rapidly, the real adjustment costs could be high. The likely outcome would be a depreciation of the US dollar relative to Asian currencies, a movement out of dollar-denominated assets, and an increase in long-term US interest rates. Such a rate rise would crimp US demand growth, and could also have secondary impacts by bringing down housing prices sharply, reducing household wealth and spending. Currency appreciation would have adverse effects on Asia's exports, with potentially serious consequences for growth and employment. Policy coordination to ensure an orderly transition to a steadier international regime would be desirable. This baseline assumes that resolution of the imbalances will not be quick, and sudden changes are not anticipated.

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