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

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2013
prove inaccurate, in part due to a lack of full
accounting of the size of stock of foreign short-term
capital which has built up in economies over recent
years. The ESCAP vulnerability measure provides a
measure of reserve adequacy taking into account a
comprehensive estimate of the stock of such capital
inflows. It indicates that a number of economies
in the region remain significantly vulnerable to a
renewed episode of short-term capital flight (see
figure 1.11).
The other key concern pertaining to using foreign
reserve accumulation as the primary approach to
addressing pressure on economic management
from the entry of short-term capital flows is that
such an approach does not deal with the impact
on asset markets of any sudden outflow. While
exchange rate depreciation may be moderated by
the use of reserves, equity or property markets
could nevertheless decline sharply and substantially,
therefore causing hardship for domestic investors
and possibly initiating a banking crisis. This
problem highlights the fact that foreign reserves
accumulation is a second-best approach to dealing
with such inflows as it does not tackle them at the
source of entry and therefore does not address
the various negative impacts within economies of
such inflows.
An effective approach for managing disruptive shortterm
capital inflows is to limit the quantity and
areas of the financial sector in which such flows
may enter. Capital controls, as recommended by
ESCAP for a number of years (ESCAP, 2010a), and
other macroprudential measures have been gaining
in popularity in recent years as policymakers are
increasingly realizing that economies are living with
a “new normal” of consistent pressure on their asset
markets from foreign investors due to the global
environment. To protect the independence of their
macroeconomic policies, governments have been
willing to give up the dubious benefits of dependence
on easily reversible short-term capital flows in order
to be able to dictate their own exchange rate policies
and protect their citizens and banking sectors from
excessive dependence on the whims of the global
financial markets.
Uncertainties regarding the causes and effects of
inflow surges, as well as the country, sector and
time specific aspects defining capital inflows call
for a careful strategy towards mitigating possible
negative effects. This has been true of the Asia-
Pacific region for decades, particularly as more than
60% of past inflow surges have ended suddenly. 10
It is particularly relevant now in the region due to
the unpredictable effects demonstrated by successive
Figure 1.11. Vulnerability yardstick as a percentage of foreign reserves in selected developing Asia-Pacific
economies
China
Russian Federation
Least
vulnerable
Kazakhstan
Philippines
Thailand
India
Indonesia
Malaysia
Republic of Korea
Most
vulnerable
0 50 100 150 200 250
Sources: ESCAP, based on data from CEIC Data Company Limited. Available from http://ceicdata.com (accessed on 6 March 2013).
Note: Vulnerability yardstick is the sum of short-term external debt, latest quarterly imports based on four-quarter moving average and estimated
international portfolio investment position. Based on latest avaliable data.
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