Capital Flows To Asian Market

T H I S S L I D E S R E P R E S E N T S T H E V I E W S O F T H E A U T H O R A N D D O E S N O T N E C E S S A R Y R E P R E S E N T S B V V I E W S O R S B V P O L I C Y

Downward trend of capital flows to Asian economiesCapital flows to Asian economies experience downward trend especially after the GFC in 2008

2010-2013 capital flows exhibited rebounded as Asian economic recovered however capital flows reduced after this recovery:

◦ Economic recovery was short lived;

◦ Advanced economies still remained sluggish;

◦ China uncertainty of hard/soft landing;

◦ Commodity price fell sharply;

The downward trend is clear even if China is excluded out of picture

Impact of normalization process from US and EU

But some Asian countries still experience rebound of capital flow in 2017

FDI net inflows (% GDP)

(4.00)

(2.00)

-

2.00

4.00

6.00

8.00

10.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

FDI net inflows % GDP

China India Indonesia Korea, Rep. Malaysia Philippines Thailand Vietnam

FDI net outflows (% GDP)

(2.00)

(1.00)

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

FDI net outflow (% GDP)

China India Indonesia Korea, Rep. Malaysia Philippines Thailand Vietnam

Portfolio Investment (% GDP)

(15.00)

(10.00)

(5.00)

-

5.00

10.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Portfolio Investment (BoP, % GDP)

China India Indonesia Korea, Rep. Malaysia Philippines Thailand Vietnam

Capital flows to Asian economies

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Capital flows to Asian economies

China Capital flow (% of GDP) India Capital flow (% of GDP) Indonesia Capital flow (% of GDP) Korea, Rep. Capital flow (% of GDP)

Malaysia Capital flow (% of GDP) Philippines Capital flow (% of GDP) Thailand Capital flow (% of GDP) Vietnam Capital flow (% of GDP)

China capital flow

Philippines capital flow

Capital flows to VietnamSlowdown after 2008, however capital flows have picked up recently

FDI is the main component of capital

Registered capital trend from 2014 shows a clear decline of capital from USA, but growth remains upward for capital from other area, especially from beginning of 2017

Economic performance, rising equity market are the driving force for this positive upward in capital

FDI and PI in Vietnam

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Q1/2015 Q2/2015 Q3/2015 Q4/2015 Q1/2016 Q2/2016 Q3/2016 Q4/2016 Q1/2017

FDI and PI in Vietnam

Foreign Direct Investment (Mil. USD) Portfolio Investment (Mil. USD)

FDI to Vietnam (growth rate %)

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

EU ASEAN China USA Japan Korea World 3 区間移動平均 (EU) 3 区間移動平均 (USA)

Impact of the monetary policy changes in the U.S. and EU to Asian financial marketsFed’s and EU’s normalization policy could encourage the reversal of capital to advanced economies and put pressure on raising domestic interest rates.

Encourage capital to return to the advanced economies

Prospects of capital flows in Asian economiesThe main drivers for capital flows in Asian economies

IMF 2016b, Powell (2016) Koepke (2015), Ahmed and Zlate (2014)◦ Economic Fundamental factor: GDP growth differential

◦ Risk perception: VIX, Corporate Spread

◦ Commodity price

◦ Interest rates differential

Model shows capital flows has positive relationship with the pickup in economic performance, declining in credit spread (bond) and rising in equity price.

In Powell (2016), turnaround in commodity price and improvements in risk sentiments attributes to recent rebound in EME. The recent pick up of capital flows has not outrun its fundamental determinants so there is room for flows to increase.

Impact of the monetary policy changes in the U.S. and EU to Asian financial marketsAsian financial market vulnerabilities

◦ Financial System Soundness: Appears to be strong and healthy

◦ Credit development: Potential vulnerability if compared to threshold of 127 (MFSD staff estimation).

◦ China has the highest Credit/GDP ratio however Chinese corporates are much less exposed to changes in exchange rates and global interest rates. In depth study from Powell (2016) shows the rise in borrowing cost needed to be accompanied by a more generalized adverse turn of 20% earnings reduction and 20% hit to the value of EME currencies against the dollar for debt at risk (debt of those firm with less than 2 ICR) to make the EME debt-at-risk to the level prior to Asian crisis (30% of GDP).

Impact of the monetary policy changes in the U.S. and EU to Asian financial marketsThe normalization of US and EU process has been and should continue to be gradual

Long run Fed fund rates is expected to still below level before GFC after adjustment

Asian economies should have sufficient time to adjust

Domestic credit/GDP

-

50.00

100.00

150.00

200.00

250.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China Indonesia Malaysia Philippines Singapore Thailand Vietnam

Capital Adequacy Ratio

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CAR

China, P.R.: Mainland Indonesia Korea, Republic of Malaysia Philippines Singapore Thailand Vietnam

Bank non performing loans/Total gross loans

0

1

2

3

4

5

6

7

8

9

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China Indonesia Malaysia Philippines Singapore Thailand Vietnam

ROA (%)

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

China, P.R.: Mainland Indonesia Malaysia Philippines Singapore Thailand Vietnam

ROA

ROA 2005 ROA 2006 ROA 2007 ROA 2008 ROA 2009 ROA 2010 ROA 2011 ROA 2012 ROA 2013 ROA 2014 ROA 2015 ROA 2016

Impact of changes in US, EU monetary policy to Asian economies is manageableMost likely that challenges posed by normalization of advanced economies will be manageable.

Capital flows to Asian economies not likely to exhibit sharp fall as the prospect of Asian economic activity continues to be expected strong growth.

Falling in capital flow should not posed significant threat as Asian financial sector’s resilience has strong been improved from Asian financial crisis.