Rationalizing Emerging Asia’s
Foreign Reserves Build-up
1
A Global Ponzi Scheme
US CA deficit
US growth
Asia reserve build-up
Demand for US
T-Bills buoyant
Capital
Inflow
US consumption
and fiscal binge
- US$ supported
- Low US interest rates
2
A reluctance to allow rapid exchange rate appreciation...
% Appreciation between Dec. 2001 and April 2004
Phill
-8.66
Hong Kong
-0.02
China - .
0 01
Malay
Taiwan
0.01
4.52
Singapore
7.70
Thailand
9.39
Korea
10.67
Japan
16.06
Indo
16.30
34.68
Euro
-10
0
Source: CEIC
10
20
30
40
3
... has led to reserve accumulation
Reserve Outstanding Feb. 2004
(Billion USD)
15.64 Philippines
% Change end-2001 to Feb. 2004
0.65
123.53 HongKong
36.00
42.92
101.10
163.01
49.23
224.80
776.86
415.72
-50
11.11
Indonesia
Thailand
Singapore
Korea
Malaysia
Taiwan
Japan
China
-30
-10
Source: IFS, CEIC
28.50
30.10
33.38
58.53
59.60
83.95
93.27
95.94
10
30
50
70
90
4
The Domestic Perspective
•
Situation reminiscent of early 1990s
–
•
Resistance to rapid appreciation not unwarranted
–
–
•
Insufficient outflows as opposed to excessive inflows
Local financial markets may not be sophisticated
enough to allow effective hedging
Reserves bestow important benefits
But sustained sterilization entails significant costs
that should not be overlooked
5
The Domestic Perspective: The Thai Case
6
Growth rebound driven by exports and private consumption...
Contribution to GDP Growth
Percent
12
8
4
0
-4
1999
2000
2001
2002
2003
2004Q1
-8
-12
Private C
Pub C
Investment
Export of G&S
Import of G&S
GDP Growth
7
...resulting in an asymmetric growth pattern
Non-Traded/Traded GDP
Percent
67%
65%
63%
61%
59%
57%
2003Q3
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
55%
8
Significant reserve accumulation...
Contribution to Monetary Base Growth
100%
80%
NFA
Net claims on public
Claims on Fin institutions
Other items (net)
M0 growth
60%
40%
20%
0%
-20%
-40%
-60%
9
Nov-03
Oct-03
Sep-03
Aug-03
Jul-03
Jun-03
May-03
Apr-03
Mar-03
Feb-03
Jan-03
Dec-02
Nov-02
Oct-02
Sep-02
Aug-02
Jul-02
Jun-02
May-02
Apr-02
Feb-02
Jan-02
-100%
Mar-02
-80%
...has had to be sterilized
Baht
BOT Bonds
Dec-02
Feb-03
Million
400,000
Sterilization Operations
Net Forward Position
Net R/P
300,000
200,000
100,000
0
-100,000
-200,000
-300,000
Apr-04
Mar-04
Feb-04
Jan-04
Dec-03
Nov-03
Oct-03
Sep-03
Aug-03
Jul-03
Jun-03
May-03
Apr-03
Source: BOT
Mar-03
-500,000
Jan-03
-400,000
10
While inflation continues to remain subdued...
3
%
2
Headline inflation
1
Core Inflation
0
-1
Jan
2000
Jul
Jan
2001
Jul
Jan
2002
Jul
Jan
2003
Jul
Jan
2004
11
M a r -9 0
S e p -9 0
M a r -9 1
S e p -9 1
M a r -9 2
S e p -9 2
M a r -9 3
S e p -9 3
M a r -9 4
S e p -9 4
M a r -9 5
S e p -9 5
M a r -9 6
S e p -9 6
M a r -9 7
S e p -9 7
M a r -9 8
S e p -9 8
M a r -9 9
S e p -9 9
M a r -0 0
S e p -0 0
M a r -0 1
S e p -0 1
M a r -0 2
S e p -0 2
M a r -0 3
S e p -0 3
...potential for loans to surge should not be discounted
1.5
Credits/Deposit
1.4
1.3
1.2
Credits/Deposit
(4-quarter moving average)
1.1
Credits/Deposit
1
0.9
0.8
Credits/Deposit
Source : BOT
Credits/Deposit (4-quarter moving average) 12
Domestic Implications
•
Sterilization is really fiscal policy
–
–
•
Undervalued exchange rate no more desirable than
overvalued one
–
•
But no adjustment impetus
Resources could be spent on facilitating adjustment
instead
Build up imbalances and potential risks in the future
Onus of adjustment more on inflation rather than
nominal appreciation
13
The Lender’s Curse
Resist appreciation
Reserve build-up
Delay structural adjustment
- Significant quasi-fiscal costs
- Discourage investment
- Balance sheet exposure
- Reduced incentive to hedge
- Encourage speculation
- Credit boom
- Export sector subsidized
- Risk-bearing subsidized
14
The Way Out
Orderly adjustment in the US dollar
•
Continue financing US deficit to help support nearterm global recovery, but allow adjustment to take
place
US dollar depreciation unlikely to be enough
•
•
•
Ultimately, the US needs to save more (preferable to
less domestic investment)
More reliance on domestic demand in Asia
Need cooperative strategy that facilitates rebalancing
of demand across countries
15
Policy Environment
•
•
•
Determine appropriate balance between nominal
exchange rate and price adjustments
Use fiscal policy, structural reforms, or microbased initiatives to facilitate adjustment
Greater exchange rate flexibility
–
–
–
•
Puts the onus of adjustment more on external demand
Can impart needed tightening of macro-conditions
Further liberalization of capital account
If resist appreciation then tighter fiscal policy may
be appropriate
–
But involves contraction in domestic demand
16
Structural Reforms
To facilitate shift towards domestic-oriented growth
and cope with heightened competition
• Shift focus from demand management towards
supply creation
–
–
•
Infrastructure and industrial expansion
Increase productivity through competition
Move up value-added chain
–
–
–
Concentrate on services sector
Improvements in training and education system
Attract more FDI
17
Moving up the product ladder: the case of Thailand
Share of Thai Exports
60
Less sophisticated
More sophisticated
50
40
30
20
10
0
Texttiles
1979
Food
Products
1984
Machinery Machinery Transport
ex.
Electric
Equip.
Electrical
1989
1994
S cientific
Equip.
1999
18
Structural Reforms
To increase institutional flexibility and resilience
• Strengthen and deepen financial markets
–
–
–
•
Banking and corporate reforms
Improved financial access and risk management
Legal and judicial reforms
Increased flexibility
–
Social safety net and labor market reforms
19