The Asean-5 economies – Indonesia, Malaysia, Thailand, the Philippines
and Vietnam – recovered very rapidly from the global financial crisis in
2008-09 on the back of sound economic fundamentals and a heavy and
well-targeted dose of monetary and fiscal stimulus.
However, except for Vietnam, the
recovery was aided by strong capital inflows that poured into the region
following the crisis. The attraction was that these countries offered far
better growth and interest rates than were available in the West. Moreover,
exceptionally loose monetary policies in these advanced economies pushed
capital flows into the region.
It’s important to ask how this
surge in capital inflows compares to the one we saw in the run-up to the
1997-98 Asian crisis, which was followed by a damaging exodus of capital. The
inflows this time around have not been nearly as significant and persistent as
they were in the run-up to the Asian crisis. However, while smaller, the
inflows came in over a shorter period of time and were more concentrated on
portfolio flows, which means they can leave as easily as they came.
Another important issue is the
extent to which these inflows contributed to the credit-led recovery we have
seen in most Asean-5 economies. Our analysis shows that capital flows have had
a significant bearing on credit cycles in Asia over the past 20 years. More
specifically, over the past three years capital inflows have explained more
than 50 per cent of the rise in
credit-to-GDP ratios in some of the Asean-5 economies, according our estimates.
The implication is that the five
economies remain vulnerable to gyrations in capital flows, although not as much
as they were in the run-up to the Asian crisis, when inflows were much larger
and fundamentals generally weaker. This is particularly significant at the
moment, with the region awaiting either a gradual global economic recovery or a
deeper global slowdown, which could mean feast or famine for capital flows and
credit growth.
This implies two different policy
responses. If capital flows reverse in response to a significant worsening of
the debt crisis in Europe, policy stimulus will be needed to cushion the blow.
The good news is that there is room to ease monetary and fiscal policies, but
not as much as there was in 2008-09 due to the already low monetary policy
rates and the maturity of the credit cycle.
If capital inflows pick up again
as global economic and financial conditions gradually stabilise, as we expect,
the risk of an overextension of credit and a build-up of asset bubbles will
increase. This would call for pre-emptive tightening of macroeconomic and
macro-prudential policies, allowing exchange rates to strengthen, and, if
needed, selective capital controls. However, tightening measures, even if they
are eventually needed, are not on the cards until next year.
Leif Eskesen
Leif Eskesen is chief economist for India & Asean, at HSBC
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