Asean may need to manage capital inflows, IMF says

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Southeast Asian nations may need to manage excessive short-term capital inflows to avoid destabilizing the region's economic recovery, the International Monetary Fund said.

Economies in the region may need measures against asset- price bubbles, Naoyuki Shinohara, an IMF deputy managing director, said at a press conference Thursday in Nha Trang, Vietnam. Economic growth in the region may be 5.5 percent in 2010, he said.

"Capital inflow is something that should be welcomed, but there are cases when excessive short-term capital flow could disturb sound economic management," Shinohara said. Management options include fiscal tightening, exchange-rate flexibility, and reserve accumulation, he said.

Asian equities and currencies have climbed this year as the region's economic recovery draws funds to its assets, and policy makers from Malaysia to China have started withdrawing monetary stimulus to avert asset bubbles. Indonesia's stocks are in a bubble and officials are prepared to put controls on capital inflows if needed, a central bank official said Wednesday.

Risk for region

Global capital flows are likely to improve from last year's lows as the world economy recovers, the World Bank said in a report released Wednesday. The Washington-based lender said East Asia may get a "larger share" of the increase in capital inflows this year. The global equity rally has added more than $2.2 trillion to the value of stocks this year.

Asian Development Bank President Haruhiko Kuroda said Thursday the return of capital flows to Asia is a risk for the region.

"It is critical to carefully manage capital flows to the region to ward off potential asset bubbles," Kuroda told the finance ministers today. "Each country will have to choose its own appropriate policy mix of currency flexibility, a clear and stable monetary and fiscal policy, enhanced regulatory and supervisory efforts and even temporary capital controls."

The MSCI Asia Pacific Index has risen 5.9 percent this year as stock markets in Indonesia, Thailand, Malaysia and Vietnam gained.

Indonesian bubble

Indonesia's stock prices are "exceeding the fundamental value," Perry Warjiyo, the head of the central bank's economic research and monetary policy division, said in an interview on Wednesday. While the bank is "confident" Indonesia can cope for now, a study on the feasibility of imposing capital controls has some measures that can be used to slow capital flows on a temporary basis "if the market behaves irrationally," he said.

Malaysia, India and Vietnam are among Asian nations that have raised interest rates to avert asset bubbles and fight inflation. China has asked banks to set aside more money as reserves to reduce liquidity in the financial system.

"Carefully designed capital controls could also be part of the appropriate response in certain limited circumstances, but these are exceptional measures," Shinohara said.

No plans

Southeast Asian economies have no plans to impose capital controls to regulate the flow of funds into the region, even as its markets attract "strong interest" from investors, Singapore Finance Minister Tharman Shanmugaratnam said after the Asean ministers' meeting Thursday.

Vietnam, which is "enjoying relatively high economic growth," will need to restrain the budget and trade deficits in order for expansion to be sustained, Shinohara said. "Reserve accumulation itself may not be consistent with the policies of priority that they have at this moment."

Asean comprises Indonesia, Thailand, Malaysia, Singapore, Brunei, the Philippines, Cambodia, Laos, Myanmar and Vietnam. Formed in 1967, its members have a combined gross domestic product of more than $1.1 trillion and a population of about 570 million people.

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