Summary of Discussion from Networking Lunch for Representatives from ASEAN+3 Countries at TSQ Trafalgar Sq.

Issues of Discussions:

I.Hot flows of Money into Asia

Lead discussion by Thailand (Ekniti);

• QE and excess global liquidity together with low interest rates has caused money flows to fastest growth region (including ASEAN+3)
• Last year, ASEAN+3 received large capital inflow in capital markets, leading to domestic currencies appreciate (Baht appreciated). This has built up pressures for rising inflation and asset prices in these countries (except Japan where there are still facing deflation)
• Crisis in Europe and better prospect in the US has caused money to flow back to the US market since the beginning of the year.
• Although capital has flown back to US, it is expected to continue to flow back to Asia because of strong economic fundamentals in Asia
• How to deal with hot money? 4 ways;

1. Do nothing. Allow exchange rate to fluctuate. e.g. US, Australia

2. Exchage rate intervention by buying currency and put in international reserves while issuing bonds to sterilize and absorb liquidity out of the market to reduce inflationary pressure

3. Capital control e.g. Chile tax on capital inflow, Malaysia blocked capital outflow in 1998

4. Banking Regulation by imposing higher reserve requirement on foreign exchange positions e.g. Brazil just introduced in Oct 2009

• Indonesian government is keen to study the impact and measures to deal with hot flows of money and to host a global seminar with IMF in March2011 in Bali.

• Rep from Singapore: Implementing monetary policy through exchange rate/ allow exchange rates to fluctuate within bands and intervene in foreign exchange market on regular basis. There are many ways to intervene to control asset price bubble e.g. intervention in property market or limit loan made from banks to property market or caps.
• Rep from Korea: No direct capital control to prevent excessive volatility in financial market. Using demand-side policy: forward exchange limit on foreign exchange derivatives to reduce speculations and increase long-term borrowing.
• Rep from Thailand (Ekniti): Thai government reintroduced 15% withholding tax on interest payments for international bond holders. This will create level playing field between domestic and international bond holders in investing in bond markets.
• Rep from Japan: IMF recommends macroeconomic policy. Both monetary and fiscal policies can impact capital flows.
• Rep from Thailand (Ekniti): Macroeconomic policy is necessary but not sufficient. Each country has domestic problems to deal with macro policy e.g. inflation, fiscal deficits, etc. But each country should be aware of the problem of impossible trinity—cannot do 3 things together: interest rate policy, opened current account, fixed exchange rates — that was the reason for economic crisis in Thailand in 1997. In addition, regional cooperation should be strengthening to cope with hot money in the region.
• Rep from Indonesia: Use bank regulation to increase reserve ratio. Government is considering restriction on the movement of short-term money. A month holding period was introduced. Indonesia agreed on the importance of regional cooperation.
• Rep from Philippines: not consider control and occasionally intervene in the exchange rate market. last country to increase interest rate/ now start discussing about inflation
• Rep from Vietnam: Different problems than other countries in the region. Now the country is facing with the dilemma of exchange rate devaluation and rising inflation. Vietnam’s markets have not been deeply developed. There are still 2 markets for exchange reate: real market and black markets.

• Media criticized it for being unsuccessful as Mr. Sarkozy’s proposal is too ambitious — coming election in France
• Key message in communique: balanced growth, reduce excessive imbalances, maintain current account imbalances at sustainable level — to agree on indicators
• Emphasis by France on avoidance of disruptive fluctuation in capital flows, macro-prudential measures.
• Work to strengthen local capital market and domestic currency borrowing in emerging and developing economies
• Issue on excessive commodity price volatility, food security, agricultural products—G20 has different opinions especially on issues related to subsidies and food security, supply and demand sides
• There were a lot of discussions on Basel III new standards for Banks and Role of credit rating agencies. Work on systematically important financial institutions (SIFI) and indicative criteria to be finished by next Summit.
• Criticism on the paragraph in communique that calls on OECD, FSB and others to develop common principles on consumer protection in the field of financial services as G20 has become too dominant.

Source: Fiscal Policy Office / www.fpo.go.th