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ADB sounds warning about 'asset bubbles' in region

By Anthony Rowley
The Business Times
Saturday, Mar 23, 2013

The Asian Development Bank (ADB) has sounded a strong warning about the danger of "asset bubbles" developing in the region's local-currency bond markets as foreign capital pours in, searching for higher yields than investors can obtain in advanced economy markets.

These concerns echo warnings voiced by central banks in other regions such as Latin America as they struggle to cope with what some refer to as a "tsunami" of foreign capital inflows.

The ADB's warning on Monday came on a day when global financial markets were plunged into fresh turbulence by the re-emergence of a eurozone crisis in Cyprus. Such an event could trigger much bigger capital outflows as jittery investors scramble for cover, analysts said.

Another fear is that some Asian and other emerging economies could reach for capital controls if market volatility re-appears - a development that could panic investors into accelerating their withdrawal of funds from emerging markets and into "safe-haven" investments elsewhere.

There has been a sharp surge of foreign money into emerging Asian bond markets over the past year and more especially in recent months, the ADB reported in its latest Asia Bond Monitor.

"Emerging East Asia is much more resilient than it used to be, but governments still need to be careful that the surge in capital inflows does not fuel excessive rises in asset prices," Thiam Hee Ng, senior economist in the ADB's Office of Regional Economic Integration, was quoted as saying.

They should also be "prepared for a possible reversal in the flows when the economies of the US and Europe pick up again", Mr Ng cautioned.

By the end of 2012, emerging East Asia had US$6.5 trillion (S$8.13 trillion) in outstanding local currency bonds versus US$5.7 trillion (S$7.14 trillion) at the end of 2011, the ADB noted. This represented a quarterly increase of 3 per cent and an annual increase of 12.1 per cent in local-currency terms.

Corporate markets, though smaller than government bond markets, drove the increase, growing 6.2 per cent quarter on quarter and 18.6 per cent year on year to US$2.3 trillion (S$2.88 trillion).

Emerging East Asia is defined by the ADB to include China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam. "Investors have been putting their money to work in emerging East Asia since the early 1990s, but the flows have picked up pace in recent years because of low interest rates and slow or negative economic growth in developed economies while emerging East Asia has enjoyed high growth rates and appreciating currencies," the ADB said.

Investment is increasingly coming from overseas, with foreign ownership in most emerging East Asia local-currency bond markets increasing in the second half of 2012.

In Indonesia, for example, overseas investors held 33 per cent of outstanding government bonds at the end of 2012, while foreign holdings of Malaysian government bonds had reached 28.5 per cent of the total at the end of September 2012.

The fastest-growing bond market in emerging East Asia in 2012 was Vietnam, 42.7 per cent bigger than at end-2011, largely due to the rapid expansion in the country's government bond market.

The Philippine and Malaysian markets grew 20.5 per cent and 19.9 per cent respectively, while India's market expanded by 24.3 per cent to US$1 trillion (S$1.25 trillion). Japan still has the largest market in Asia at US$11.7 trillion (S$14.64 trillion), followed by China at US$3.8 trillion (S$4.7 trillion).

One promising development, the ADB noted, is that governments in emerging East Asia are increasingly opting to sell longer-dated bonds, "another sign of strong market confidence in the economies of the region. This is making them more resilient to possible volatile capital flows, particularly in the case of Indonesia and the Philippines".

But rising market volatility remains a threat in the current climate, analysts say, and contagion could spread to Asia.

"Costa Rica has imposed a series of drastic measures to slow capital inflows and relieve upward pressure on its currency while Brazil continues to dodge short-term capital inflows through a barrage of measures," Emerging Markets newspaper reported in its latest issue. "Even countries with many more reservations about the effectiveness of such measures, such as Peru and Colombia, are using more tools to turn away short-term capital," it added.

The IMF has, meanwhile, given qualified approval to the use of capital controls in some circumstances.

http://news.asiaone.com/News/AsiaOne%2BN...967/2.html