World Bank Says East Asia Should Consider Stimulus Withdrawal to curb the risks of asset bubbles and inflation

World Bank Says East Asia Should Consider Stimulus Withdrawal

Asia’s emerging economies should consider reining in monetary stimulus to curb the risks of asset bubbles and inflation as policy easing in developed nations spur capital inflows, the World Bank said.

Demand-boosting measures that helped sustain growth “may now be counterproductive,” the Washington-based lender said in its East Asia and Pacific Economic Update released today. “As the global economy recovers, an emerging issue is the risk of overheating in some of the larger economies,” it said in a release accompanying the report.

The International Monetary Fund warned last week that risks from the easing policies of central banks around the world are increasing as the Bank of Japan (8301) joined its counterparts in the U.S. and Europe in unleashing monetary stimulus to end 15 years of deflation. Gross capital inflows into the East Asia and Pacific region surged 86 percent in the first quarter from a year earlier, the World Bank said in its report, adding to pressure on inflation and asset prices.

“Near-zero interest rates and new and protracted rounds of quantitative easing in the United States, European Union, and Japan are inducing large capital inflows into emerging markets including in East Asia,” the World Bank said. “The risk of an asset boom in the markets, in which global liquidity spills over is emerging, with asset valuations moving ahead of fundamentals and possibly a correction down the road.”Some countries in the region, which accounted for 40 percent of global growth last year, need to manage renewed capital inflows through “an appropriate macroeconomic stance and sufficient flexibility in the exchange rate,” the lender said.

Withdrawing Support

The World Bank’s comments echo those of International Monetary Fund Managing Director Christine Lagarde and the Asian Development Bank this month.

Central banks in Asia should “think about the timing and pace of withdrawing monetary support” as strong credit growth has seen a buildup of financial imbalances, Lagarde said in a speech in Boao, southern China on April 7. The ADB said in an April 9 report that the region’s growth recovery faces the risk of asset bubbles from rising capital inflows.

The World Bank trimmed its estimate for 2013 growth in Developing East Asia, which excludes Japan and India, to 7.8 percent from a 7.9 percent forecast previously. That’s still more than three times faster than the 2.4 percent it projects for the world economy. Its estimate for the region’s growth next year is unchanged at 7.6 percent.

China Headwinds

“This remains the most dynamic region in the world,” Axel van Trotsenburg, the bank’s vice president for East Asia and Pacific, said in an interview. “After some softening of growth in 2012, we will see some pick up in 2013 in developing East Asia. This is largely due to China.”

China, the region’s biggest economy, will expand 8.3 percent this year, the World Bank forecast, lowering its estimate from 8.4 percent previously. Indonesia is projected to grow 6.2 percent, down from a 6.3 percent forecast.

Internal rebalancing in China poses a continued risk to the region’s outlook, with “domestic headwinds” including risks in the property sector, financial system and local government finances “buffeting the government-managed slowdown,” according to the report. A 5 percentage-point drop in the pace of China’s investment growth would reduce the region’s aggregate gross domestic product by 1.3 percent and drag down exports, it said.

Yen Depreciation

The World Bank also warned that continued depreciation of the yen could affect trade in the region in the short term, although if Japan manages to escape deflation and rekindle growth, “all developing economies in the region would benefit through higher exports,” it said.

Officials from South Korea to the Philippines have taken action, or are studying measures, to counter capital inflows and central banks across the region kept borrowing costs unchanged this month.

Indonesia last week held its benchmark interest rate at a record low, as policy makers assess the need to support growth against rising inflationary pressures fueled by plans to cut oil subsidies. Thailand’s central bank kept borrowing costs unchanged earlier this month and said it will be vigilant about asset-price risks as it resisted calls by the government for monetary easing.

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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