Thiam Hee Ng, Senior Economist with ADB's Office of Regional Economic Integration, discusses how to deal with the rise in investment in Asia's local currency bond markets.
Title: Facing Surging Capital Inflows
Description: Thiam Hee Ng, Senior Economist with ADB's Office of Regional Economic Integration, discusses how to deal with the rise in investment in Asia's local currency bond markets.
Thiam Hee Ng
Office of Regional Economic Integration
Asian Development Bank
Q: What are the risks of high capital inflows into Asia’s local currency bonds?
A: One concern has been the increase in liquidity in the system from these capital inflows. This could potentially cause asset price inflation in the region. In addition we also see that the local market conditions are very much still dependent on global market conditions so if you have a global financial shock, similar like what we had during the Lehmann crisis in 2008, we could also see a lash outflow of funds from the region which could be destabilizing to the financial system.
Q: How should governments deal with these risks?
A: We believe that short term measures that try to minimize the disruptive capital flows could be a useful short term measure. At the same time, we would like to see micro-potential measures that countries can implement that would minimize the risk of asset price inflation, so by this current speculation on property market for example. And we have seen some countries in the region have already started along that road.
Q: Are local currency bonds more or less resilient to capital flows than in 1997-1998?
A: Now there’s definitely the local currency market has made the region’s financial market more resilient. For one, it has reviews that has eliminated basically the currency mismatch that was at the heart of Asian financial crisis. Terms nowadays are borrowing in local currency so the repayments are in local currency and their revenues are in local currency so that currency mismatch where we had before where terms were borrowing in US dollars mostly, while the revenue base was in local currency so when the currency depreciated it causes great difficulty in repayment. At the same time, we have also seen that terms have been able to borrow for longer maturity back then during the Asian financial crisis most of the borrowings are interbank borrowing and we know, very short term, so liquidity could suddenly dry out. But now, with longer maturity, terms are definitely much resilient towards any financial shocks.