Since 1990, Asia has become a continent with high amount of capital inflows but recent news show that this trend has been changing in the last months. The purpose of this post is to analyse the main causes to this change and what one can expect from the future.
Until 1997, no modern crisis had hit Asia. Its countries had a high real GDP growth, a high rate of convergence to the developed countries and, for thirty years, everything seemed to be working well – this became known as the “Asian Miracle”.
All this interest in Asia was due to some of the economies characteristics, i.e., their pull factors: high rates of savings and investment, high levels of education and accumulation of human capital and low inflation.
These economies had a Soft Dollar Peg regime. In the first half of 1997, Bath – Thailand’s currency – was being pressed to depreciate due to consecutive external deficits. Also Yen – Japan´s currency – depreciated against the Dollar, leaving the rest of the countries less competitive in comparison to Japan. This resulted in a set of speculative attacks and a high level of capital outflows that caused the real depreciation in Thailand, Malaysia, Philippines and all countries from the East of Asia with the exception of China and Taiwan because of their restrictions to capital flows.
The second episode of capital inflows was in 2000 but it ended in 2009 due to the recent global financial crisis. As represented in the following graph, the Asian economies recovered quickly and returned to economic expansion reaching their recent peak in mid-2010. This is the result of a healthier current account in the period before the global crisis.
Since May 2013, Asian currencies values have been dropping, namely the Indian Rupee, the Indonesian Rupiah and the Thai Baht, despite the fact that interest rates in these economies remain higher than in the developed economies. For instance, the current interest rate in India is around 8% (and in all other emerging Asian countries it is always higher than 2%) while in the USA it is 0,25%, which tends to capture capital inflows.
The increasing capital inflows in the last years made Asian emerging economies very dependent on foreign investors. Note that this dependence is not irreversible since they have high saving rates. While Europe has a saving rate of 5%, countries like India and China have saving rates of around 25% and 30%, respectively. This could be the solution to stop the high dependence in capital inflows but they fail to allocate capital properly because of their less developed market structures. Thus, more intra-flows are needed and the challenges to achieve this are mainly regulatory.
This dependence results in a high vulnerability of the Asian currencies when facing a massive capital outflow. Therefore, the Central Banks of these countries lose reserves in order to defend the currency parity against dollar. From May to July, these losses have reached a value of $81 billion, with the exception of China.
The relevant question is why these capital flows have become less attractive. One has to see this issue from both points of views: the foreign investor and the receiver country.
The group of foreign investors is composed by developed countries that used to send capital to emerging economies. Nevertheless, after the financial crisis and with their policies and regulations changed, they have fewer incentives to keep sending capital abroad. For example, in the USA, the quantitative easing implemented by the US Federal Reserve due to the banking crisis, is coming to an end. This may be the main reason for the Americans to be more risk averse and more willing to pull their money from the emerging markets back to the US.
The capital outflows in the emerging Asian markets are also due the fact that investors have been losing confidence in the countries assets as the risk increase due to political reasons or even because of transmitted spillovers. For example, in the case of Thailand, this increase in risk was caused by anti-government protests, leading the Bank of Thailand to cut the interest rates.
The World Bank Research found that the developing countries are going to become the “major sources, destinations, and potentially also intermediaries of global gross capital flows” by 2030.
Beatriz Luís, #648
Maria Azevedo, #639
United States Interest Rate, http://www.tradingeconomics.com/united-states/interest-rate
World Interest Rates, http://www.worldinterestrates.info/asiapacific.php
Capital Flight: Currencies Plunge Rapidly in Asian Economies, by Wieland Wagner, http://www.spiegel.de/international/world/currency-crisis-hits-developing-countries-in-asia-and-elsewhere-a-918714.html
Ravi Balakrishnan, Sylwia Nowak, Sanjaya Panth, and Yiqun Wu, Surging Capital Flows to Emerging Asia: Facts, Impacts, and Responses, IMF WP/12/130
Krugman, Obstfeld e Melitz, 9ª ed., cap. 22, pág. 662-677
Rupiah, Baht Lead Monthly Losses in Asian Currencies on Outflow, by Fion Li and Yudith Ho, http://www.bloomberg.com/news/2013-11-29/rupiah-baht-lead-monthly-losses-in-asian-currencies-on-outflows.html
Capital for the Future: Saving and Investment in an Interdependent World, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:23413150~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html