Economic Downturn Could Affect Capital Outflows from Asian Economies: ADB

01 September 2011 - Which Way to Pay

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Economic Downturn Could Affect Capital Outflows from Asian Economies: ADB

A senior official at the Asian Development Bank (ADB) said that severe economic downturn in major economies, such as that of the US and Europe, could destabilise capital flows in East Asian economies.

"Economic growth in emerging East Asia remains robust, but fears of slower growth in mature economies are mounting. A severe slowdown or contraction in mature financial economies could impact on emerging East Asian economies, potentially destabilizing capital inflows," Iwan Azis, head of the ADB's Office of Regional Economic Integration, said at a conference held in central Seoul.

The remarks come alongside the substantial inflow of foreign funds into the South Korean government bond market. This movement has been isolated as an emergent and potentially key risk to Asia’s No.4 economy.

If economic conditions are good, foreign fund inflow boosts economic growth by offering ample liquidity to the economy. However, it can also trigger financial market turmoil if foreign investors suddenly flow out of the economy in times of financial instability like those we are experiencing at present. The latter being the very situation which occurred during the 2008 global crisis.

Azis commented that flush global liquidity and a hunt for higher yields are driving foreign fund flows into Asia amid lower interest rates in major economies. According to the Asia Bond Monitor report released by ADB, foreigners were the largest investor of the South Korean treasury bonds between March 2010 and March 2011. This caused a three percent rise in the amount of government bonds held by foreigners upon the same period from the previous year.

However, Azis warned that a severe economic slowdown in advanced nations may destabilise capital inflows by potentially triggering capital outflows from the East Asian economies.

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