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Laurie Lande
Hong Kong, April 8: Capital flows into Asia are expected to remain flat this year even as regional stock markets show signs of a rebound, suggesting economic recovery isn't around the corner, said World Bank officials.
Last year was a dismal year for world-wide capital flows: Bonds, bank lending and portfolio equity fell 47 per cent to $72 billion, the lowest level since 1992, said the bank in its annual Global Development Finance report. Most countries in Asia saw sharp decreases in inflows, although China was an exception: It retained market access, in part because of its low external debts, huge reserves and large current-account surplus.
"Given the stabilization in Brazil's problems, we should see a moderate increase in commercial bank lending (to Asia), but there will be less lending than last year," said Mick Riordan, a World Bank economist, in an interview related to the report's release. Combined with a modest increase in foreign direct investment in several countries in East Asia, capital inflowson average would be flat, he said.
The size and direction of international capital flows are important signals of economic health. The Asian financial crisis of 1997 and the ensuing world financial turmoil is blamed in part on capital outflows from affected regions.
In fact, top finance officials from the Group of Seven major industrial nations agreed earlier this year to set up a new global forum to tighten coordination between regulators and the world's watchdog bodies and keep a closer check on capital flows.
`Lowering Prices Doesn't Work' Access to external capital is expected to remain tight in Asia and other emerging markets, said the report, meaning that financial problems would "persist in emerging markets for longer than had been predicted." This is a revision from last year's report, in which the bank forecast that capital flows into emerging markets would increase and exports from the Asian countries hit hardest by the crisis would rise sharply.
"We had thought that the very rapiddepreciation of emerging markets' currencies would make these countries extremely competitive and would sharply increase exports," explained Ashoka Mody, lead specialist for the bank's international-finance unit. "But we learned that lowering prices doesn't work in a situation where everyone is engaged in lowering prices." Any turnaround in the export picture for Asian countries will be a sign of recovery, said Mody, as it will show that the region's domestic demand is at last on the rise. This year, Mody declined to predict when this pickup will occur; part of his hesitation is due to "protectionism pressures" he sees in the U.S. -- a major trade partner for Asia -- where a number of antidumping measures have been introduced by the Clinton administration or the Congress.
Optimism Could Fade The bank's prognosis may damp growing optimism that the financial turmoil that hit Asia and other regions may be near an end. Much of that belief has been driven by rising stocks: The markets in Australia, India,Taipei, Seoul, Singapore and Hong Kong are up for the year, and in the U.S., the Dow Jones Industrial Average recently crossed the psychologically important 10000 mark.
Indeed, World Bank officials were at a loss to explain the disparity between the views of private investors and international lenders. "That's a good question," said Mody, who acknowledged that such disparities will probably lead to more volatility in financial markets as more and more capital comes from foreign investors.
"I think the bond market looks more benignly at these economies when they look at reserves, debt and country credit factors. If we look at lending to these countries, we look more at the transparency of their banking system," said Mody, adding, "The economic fundamentals you evaluate can be different based at the perspective from which you're looking."
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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