Economist: Current capital inflows bring high risks

Economist: Current capital inflows bring high risks
Business & Markets 2013
Written by Ho Wah Foon of theedgemalaysia.com
Wednesday, 13 March 2013 17:58


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KUALA LUMPUR (March 13): The current inflow of foreign funds into Malaysia and other Asian countries is “unwarranted” and is bringing financial risk to the region, a respected economist warned.

In a special report on capital inflows, CIMB’s chief economist Lee Heng Guie noted Asia has now become the largest recipient of private capital inflows, brought about by high global liquidity.

Saying that this latest influx of funds is “fuelling concerns of financial vulnerabilities”, he pointed out that Asia’s accommodative monetary stance has created an easy route of hedging, arbitrage and “carry trade”.

And this has resulted in money flowing from the low-yielding to higher-returns asset markets.

Lee noted that arbitragers are taking advantage of the cheaper borrowing cost to invest in equities and currencies, property and real estate, as well as soft and hard commodities.

The strong flow of funds into equities and bonds has resulted in increased foreign shareholdings of government bonds in Indonesia (32.8% in Jan 2013), Malaysia (30.3%) and Thailand (16.5%).

Lee remarked that the associated risks from the robust credit growth and easier credit facilities could lead to excessive lending concentration in less productive assets such as real estate, fuelling asset bubbles and financial imbalances.

He said investors, now buoyed by optimism of global economic recovery, have increased their investments in assets, leading to excess demand and market overshoot.

“The risks involved with the unwarranted capital inflows will be exacerbated when short-term capital flows are all attracted to asset markets,” he said.

Lee recounted the previous boom-bust asset price cycles have demonstrated that excessive asset price gains beyond fundamentals are unsustainable.

And often, a reversal of investors’ risk perceptions caused by policy mis-steps or on concerns over the systemic financial risks could lead to a sharp correction in asset prices, as had happened during the 1997-98 Asian financial crisis and 2008-09 global crisis.

“In our view, it will be essential to improve the effectiveness of monetary and macro-prudential policies in containing systemic risk,” said Lee in his report.