The Philippines stock exchange, Manila. Capital flows may require macroeconomic adjustment, an IMF official told the seminar (photo: John Javellana/Reuters/Corbis)
Capital Flows
The two-day event on “Managing Capital Flows: What Worked, and Why” is one of a series of initiatives aimed at promoting economic cooperation in the region.
The gathering, which took place in March 2013, was opened by Tatsuo Yamasaki, Director General of the International Bureau of the Japanese Ministry of Finance and OAP’s Director Shogo Ishii. Participants included government officials from thirteen Asian countries as well as scholars from the Japan-IMF Scholarship Program for Asia (JISPA) who attended as observers.
JISAP provides support for promising government officials with the potential to become macroeconomic managers of their country.
Recent trends in capital flows
Opening the discussion, Giovanni Ganelli of the IMF’s Regional Office for Asia and the Pacific outlined the global trends and determinants of capital flows to emerging markets.
He said global “push” factors and country-specific “pull” factors influenced the volume and distribution of capital flows, adding that the former often affected the overall magnitude and timing of flows, and the latter their allocation between countries.
Former Chief Strategy Officer of the Thai Stock Exchange, Veerathai Santiprabhob, said he expected net inflows to emerging Asia to continue into the near future given global monetary easing, increasing risk appetite among foreign investors, and strong economic performance in the region.
“The challenges posed by continued inflows require coordinated policy responses, and central banks should not be left alone to manage them,” said Santiprabhob.
The Asian experience of capital flows
Seminar participants discussed the experiences and the policies of selected Asian countries in dealing with capital flows, including the minimum holding period on central bank paper introduced in Indonesia in 2010, the use of unremunerated reserve requirements in Thailand in 2006-2008, macro prudential measures to limit banks’ foreign exchange liquidity risks introduced in Korea in 2010-11, and the policy of non-internationalization for the ringgit pursued by Malaysia since the late 1990s.
Seminar participants also discussed the IMF’s view of capital flows. Marshall Mills of the IMF’s Strategy, Policy and Review department said the Fund recognized that capital flows have both benefits and risks, and the aim of the IMF was to harness the benefits while managing the risks.
The IMF view on capital flows
The IMF acknowledged that rapid inflow surges or disruptive outflows could create policy challenges, said Mills. To respond to these challenges, macroeconomic and financial sector policies needed to play a key role, and capital flow management measures (CFMs) could also be useful in certain circumstances, he added.
Examples might include when there is limited room for policy adjustment, when adjustment takes time to be effective, or when a sudden inflow raises the risk of financial sector instability.
But, capital flow management measures should not substitute for warranted macroeconomic adjustment, and in any case should be targeted, transparent and preferably non-discriminatory, said Mills.
Capital flows management: operational issues
Hitotsubashi University Professor Akira Ariyoshi said that while the IMF view provided a consistent approach, he questioned whether it could provide a clear guide for policy makers.
“The IMF’s taxonomy is neat, but reality is messy” said Ariyoshi, who added that while the institutional view calls for CFMs to be used when the currency is overvalued, the economy is overheating, and the level of reserves is adequate, in practice, judging whether these conditions are met is not always easy.
The presentations by Mills and Ariyoshi sparked a lively debate among participants. While there is a preference under the institutional view for the least discriminatory measure that is effective, some participants expressed support for discriminatory CFMs on the grounds of effectiveness.
Several participants also shared Ariyoshi’s concerns about likely challenges in the implementation of the IMF’s institutional view.
Some practical and important operational issues have been addressed more directly in a recently released IMF Guidance Note.
Seminar participants agreed that the institutional view is a useful tool and helped promote a pragmatic approach to the management of capital flows.
Many participants said they looked forward to future discussions comparing the Fund’s view and its operational guidance with hands on experience managing capital flows.
