Popular With Investors, Emerging Markets Dread Flow of Cash

By BETTINA WASSENER
Published: October 18, 2010

HONG KONG — The World Bank flagged the potential risks on Tuesday of the flood of cash heading into emerging markets, while South Korea and Brazil signaled additional measures aimed at stemming the tide, highlighting how worried many emerging nations have become about the extent to which inflows have pushed up their currencies.

Yoshihiko Noda, the Japanese finance minister, added his voice to the chorus of concern about the flow of capital to emerging economies and called on finance ministers of the Group of 20 major economies to seek ways to stabilize currencies when they meet in South Korea this week, Reuters reported.

“Currencies will be the topic that many people will be talking about” at the meeting, Reuters quoted Mr. Noda as saying. “I hope that good ideas will be put forward there.”

A sharp rise in investments flowing into developing nations has caused many emerging-nation currencies to strengthen sharply in recent weeks, to the dismay of local policy makers and businesses, which fear a loss of competitiveness as their goods become more expensive in dollar terms.

Investors seeking to tap the positive growth environment, and the higher interest rates that are in force in many emerging-market economies, have flocked into bonds, equities and property, generating rising concern about asset bubbles.

The trend has added complexity to what was, until recently, a currency debate focused largely on the United States and China, with Washington asking Beijing to allow the renminbi to fluctuate more freely against the U.S. dollar and China resisting a rapid appreciation, fearing a potentially devastating effect on its export sector.

“This is no longer just a bilateral debate between the U.S. and China,” Frederic Neumann, a senior Asia economist at HSBC, said in Hong Kong on Tuesday.

Moreover, analysts say that the influx into emerging markets — and the upward pressure it puts on their currencies — is likely to receive added impetus if, as is widely expected, the U.S. Federal Reserve resumes buying vast amounts of U.S. government debt to aid recovery.

“Should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for large capital inflows — especially foreign direct investment — with ensuring competitiveness, financial sector stability and low inflation,” Vikram Nehru, chief economist at the World Bank for the East Asia and Pacific region, said in a statement accompanying an update Tuesday on the region’s economy.

The bank nudged up its 2010 growth forecast for the region — which includes China, Indonesia and Southeast Asia, but not India and Japan — to 8.9 percent, from its previous projection of 8.7 percent.

Growth is expected to slow next year as spare production capacity becomes scarce, economic stimulus measures are unwound and economic growth in the advanced economies remains relatively flat, the World Bank said, lowering its 2011 forecast to 7.8 percent from the 8 percent it had projected in April.

The bank also stressed that renewed flow of capital into the region, and the rise in asset prices that this has fueled, now presented a “growing risk to macroeconomic stability.”

Some emerging nations have started to take steps to slow these inflows, for example by raising taxes on foreign purchases of local bonds. Many have also intervened in the currency markets to slow the ascent of their currencies.

Brazil, where interest rates are particularly high and act as a magnet for foreign cash, raised taxes on Monday for foreigners buying local bonds, its second such move this month. Announcing the new measures, the Brazilian finance minister, Guido Mantega, called for a coordinated approach to the increasingly acrimonious topic of relative currency valuations. South Korea, meanwhile, said Tuesday it would consider lifting tax exemptions on government bonds owned by foreign investors. Such a step would make it less attractive for foreign investors to put their money in such instruments.

Ideally, the meeting of G-20 finance ministers, and a summit meeting next month of G-20 leaders, would bring about “a coordinated appreciation of emerging markets currencies, gradually, over time, to help rebalance the global economy,” Mr. Neumann of HSBC said. If not, he added, “we might see further unilateral actions aimed at protecting currencies.”

http://www.nytimes.com/2010/10/20/business/global/20asiaecon.html?_r=1&ref=business