Full Report - Subregional Office for East and North-East Asia - escap

THE STATE OF INCLUSIVE AND SUSTAINABLE DEVELOPMENT IN UNCERTAIN TIMES CHAPTER 1
Expansionary monetary policies in
the developed world are once again
leading to difficulties for macroeconomic
management in the region
Expansionary monetary policies in the developed
world are once again leading to difficulties for
macroeconomic management in the region. This is
due to the logical decisions of financial investors
to reallocate their funds from the depressed bond
markets in the developed world to currency and
asset markets in the region. Current and probable
medium-term investment returns in this region are
far more attractive in terms of both interest rate
differentials and medium-term economic growth
prospects. The comparative attraction of this region
remains largely unchanged since the previous two
rounds of QE earlier in the Great Recession of
2008-2009. The impact on capital flows to Asia-
Pacific economies during the two earlier rounds
of QE was severe, and there is little reason to
suspect that the outcome will be any different this
time around.
The announcements and implementation of the
renewed QE measures in advanced economies
had immediate spillover effects on asset markets
in the region (see figure 1.7). From the onset of
QE3, the Philippines saw net capital inflows, mainly
in the form of portfolio investment, nearly triple in
September and October 2012 from the same period
a year earlier. Indonesia and the Republic of Korea
also experienced a net inflow of about $1.3 billion
and $1.4 billion, respectively, in September 2012,
compared with a net outflow of $540 million and $2.4
billion the month before. Net foreign investment in
bonds of the Republic of Korea rose to a 17-month
high in December 2012, largely due to an optimistic
economic outlook and speculation that the Korean
won would continue to appreciate.
Equity markets in the region rallied, with the
MSCI index gaining 2.36% one month after the
announcement of QE3 in September 2012, and up
to 9.18% three months after the announcement (see
figure 1.8). The greatest rises were seen in the equity
markets of the Republic of Korea and Hong Kong,
China. The property sector is another area of interest
for financial investors. For example, during the first
month following the announcement of QE3, house
prices in Hong Kong, China rose by 3%, while in
the Republic of Korea and Singapore, they gained
1.195% and 1.125%, respectively. Governments have
responded with a host of cooling measures in the
property sectors. For example, in October 2012 and
January 2013, the Monetary Authority of Singapore
introduced a number of measures to contain a risk
of property price bubbles. In October 2012, the
government of Hong Kong, China raised the stamp
duty on house purchases to stave off speculative
investment flowing into the property markets.
Figure 1.7. Asset responses after quantitative easing implementation announcements, percentage change
35
25
QE1 Extended
17/04/09
15
QE1
30/12/08
5
QE2
03/12/10
Operation Twist
20/10/11
QE3
19/10/12
-5
-15
World MSCI index EM MSCI index Asia MSCI Excl. Japan
Source: ESCAP, based on data from CEIC Data Company Limited. Available from http://ceicdata.com/ (accessed on 15 January 2013).
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