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2nd OECD-AMRO Asian Regional Roundtable

2nd OECD-AMRO Asian Regional Roundtable

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  • 1. 0 Second OECD-AMRO Joint Asian Regional Roundtable Global Liquidity, Capital Flows, Asset Price Movements and Macro-prudential Measures in the ASEAN+3 Region
  • 2. Key focus areas Introduction • Overview of Unconventional Monetary Measures adopted by Major Central Banks post-Lehman Section 1: Quantitative Easing in Major Economies and Capital Flows into the Region U.S. Fed BOEBOJ • Correlation Analysis between QE Liquidity and the Level and Volatility of Capital Flows into the Region Correlations of consolidated QE liquidity versus: Gross portfolio flows (from BOP) BIS cross-border banking flows EPFR equity and debt flows Section 2: Macroeconomic and Financial Market Effects of Capital Inflows • Macroeconomic and Financial Market Indicators post-Lehman Exchange Rates, Reserves & Exchange Market Pressure Domestic Credit, Money Growth & Inflation Asset Prices (T-bond, Equity & Property Prices) Section 3: Macroprudential Measures adopted by Regional Economies • Policies Undertaken by Selected Economies in ASEAN+3 Region • Effectiveness of the Measures Adopted in Managing Capital Flows • Some Caveats and Policy Recommendations • Stylized Facts about Capital Flows into the Region 1 Section 4: Reversal of Capital Flows Yield Curves of Government Bonds• US Quantitative Easing Tapering Impacts on Regional Asset Prices (Equity Prices)
  • 3. 2 Quantitative Easing in Major Economies and Capital Flows to the Region
  • 4. Section 1 Quantitative Easing in Major Economies and Capital Flows into the Region Figure 2.1 U.S. Federal Reserve Total Assets and Major Components Figure 2.2 BOJ’s Total Assets and Major Components Figure 2.3 BOE’s Total Assets and Major Components Implication of QE liquidity: Significant expansion in central banks’ balance sheet as a result of the unprecedented monetary easing 3
  • 5. Pre-QE: Sep ’08 to Feb ‘09 Mar ’09 to Oct ‘09(a) Nov ’09 to Oct ‘10(b) Nov ’10 to Jun ‘11(c) Jul ’11 to Aug ‘12(d) Sep ’12 to Apr ‘13(e) U.S. Fed (USD bn) Changes in securities held outright 102.1 1,108.5 254.2 604.1 -72.4 474.1 Total assets (end of period) 1,916.5 2,161.8 2,295.5 2,865.4 2,813.0 3,318.6 BOE (£ billion) Changes in Gilts 0.0 174.8 16.1 -0.3 148.7 27.1 Total assets (end of period) 177.1 235.3 244.2 236.2 386.7 403.9 BOJ (¥ trillion) Change in JGBs & Others 0.0 0.0 22.9 16.7 22.4 13.9 Total assets (end of period) 122.2 111.4 120.3 129.6 150.0 164.3 Notes: (a) Period refers to U.S. Fed QE1 and start of BOE Asset Purchase Facility (b) October 2010 is the start of BOJ’s Asset Purchase Program (c) Period refers to U.S. Fed QE2 (d) Re-launch of the BOE Asset Purchase Facility (e) Period refers to U.S. Fed QE3. QE3 is still continuing, however, period is up to April 2013 only due to data availability Securities held outright by the U.S. Fed includes Federal Agency Debt Securities mainly by Fannie Mae and Freddie Mac, Mortgage-backed securities and U.S. Treasury securities. For BOE the instrument was mainly purchases of debt securities called gilts. BOJ bond purchases includes JGBs, Commercial Papers, Corporate Bonds, ETFs, and J-REITs (this include operations under the following programs: Funds- Supplying Operations against Pooled Collateral, Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, Funds-Supplying Operation to Support Financial Institutions in Disaster Areas and Asset Purchase Program) Sources: U.S. Fed, BOE and BOJ Table 2.1: Changes in Major QE Instruments for Selected Periods USD bn Pre-QE: Sep ’08 to Feb ’09 Mar ’09 to Oct ‘09(a) Nov ’09 to Oct ‘10(b) Nov ’10 to Jun ‘11(c) Jul ’11 to Aug ‘12(d) Sep ’12 to Apr ‘13(e) U.S. Fed (changes in securities held) 102.1 1,108.5 354.1 604.1 -72.4 474.1 BOE (changes in Gilts) 0.0 274.4 25.1 -0.5 235.1 42.7 BOJ (changes in JGBs & Others) 0.0 0.0 255.7 203.2 284.2 162.1 Total 102.1 1,382.9 634.8 806.7 446.9 678.9 Table 2.2: Consolidated QE Amounts for Selected Periods (USD billion) 4 The Size and Nature of Main Quantitative Easing Tools QE is done on staggered and sometimes overlapping periods Section 1 Quantitative Easing in Major Economies and Capital Flows into the Region
  • 6. Figure 2.5: Evolution of Main QE Instruments Across Time Figure 2.6: Gross Portfolio Flows to the Region Figure 2.7: Changes in Cross Border Bank Flows to the Region 5 Section 1 Quantitative Easing in Major Economies and Capital Flows into the Region Evolution of Main QE Instruments Across Time & Behaviour of Capital Flows into the Region
  • 7. 6 Section 2 Quantitative Easing in Major Economies and Capital Flows into the Region Correlations of Main QE Tools with Capital Flows to the Region Gauging the extent of spillover effects & contagion to the region from QE Levels Volatility QE QEt-3 QE QEt-3 Gross portfolio flows +0.54 +0.41 +0.26 +0.22 Portfolio equity +0.48 +0.25 +0.17 +0.26 Portfolio debt +0.45 +0.52 +0.20 +0.05 Table 2.3 Correlation coefficients for QE and Capital Flows Figure 2.7: Volatility of Consolidated QE against Portfolio Equity & Debt Flows Figure 2.6: Volatility of Consolidated QE against Portfolio Flows • Heightened volatility during periods of QE generally correspond to heightened volatility in gross portfolio flows to the region, particularly during the U.S. Fed’s QE1 and QE2 • Disaggregating portfolio flows into portfolio equity and portfolio debt, it is observed that most of the volatility arises from movements in portfolio equity, with portfolio debt flows relatively flat Equity Debt
  • 8. Macroeconomic and Financial Market Effects of Capital Inflows 7
  • 9. Stylized Facts about Capital Flows into the Region 8 Section 2 Macroeconomic and Financial Market Effects of Capital Inflows Figure 3.3: Gross Portfolio Inflows to Selected ASEAN+3 Economies Figure 3.2: Gross Capital Inflows to Selected ASEAN+3 Economies • In general, the average of gross capital inflows to GDP ratio between 2Q 2009 to 4Q 2012 is higher than before the global financial crisis • Although there has been a decline in gross capital inflows in 4Q 2011 due to the Eurozone crisis, the inflows seemed to rebound quickly - In Korea, although the ratio is negative, it is mainly due to outflows in financial derivatives. Portfolio inflows to Korea from 2Q 2009 to 4Q 2012 have also surpassed the average of portfolio inflows before the crisis period - Overall, only Singapore that did not experience a higher average portfolio inflows post-Lehman vis-à-vis the period before
  • 10. 9 Section 2 Macroeconomic and Financial Market Effects of Capital Inflows 1. Exchange Rates, Foreign Reserves and Exchange Market Pressure Figure 3.5: Domestic Currency/US Dollar Figure 3.6: Real Effective Exchange Rate • Most emerging and developing economies in ASEAN+3 experienced: - A sharp appreciation of their currencies against the U.S. dollar post-global financial crisis - A rise in official foreign exchange reserves during the episode of capital inflows - Reduced exchange market pressure Figure 3.7: Change in Foreign Reserves Figure 3.8: Exchange Market Pressures Macroeconomic and Financial Market Indicators post-Lehman
  • 11. Macroeconomic and Financial Market Indicators post-Lehman 10 Section 2 Macroeconomic and Financial Market Effects of Capital Inflows 2. Domestic Credit, Money Growth and Inflation Figure 3.9: Credit Growth Figure 3.10: Growth of Credit to GDP Ratio • Private domestic credit & growth of credit to GDP ratio in many ASEAN+3 economies does not seem to systematically relate to the period of capital outflows (crisis period) or capital inflows (post-crisis period) • Evidence from M2 or (broad) money growth does not suggest that domestic liquidity increased in the post crisis period • Inflation in regional economies remained subdued in the post-crisis period Figure 3.11: Money Growth Figure 3.13: Inflation
  • 12. 11 Section 2 Macroeconomic and Financial Market Effects of Capital Inflows 3. Asset Prices • Average 10Y T-bond rates is lower and equity returns have a high positive correlation with portfolio inflows • A surge in property prices is especially prominent for Hong Kong SAR, Malaysia and Singapore Figure 3.15b: Correlation between Property Prices and Gross Capital Inflows Figure 3.16a: Property Prices Figure 3.14: 10 Year T-Bond Rate Figure 3.15a: Return on Equity Figure 3.15b: Correlation between Return on Equity and Portfolio Investment Flows Macroeconomic and Financial Market Indicators post-Lehman
  • 13. Section 2 Regional Residential Property Prices • From 2011 – 2012, Indonesia residential house price grew 6.02% annually • From 2010Q2 – 2012Q2, Malaysia residential house price grew 10.8% annually • From 201Q1 – 2013Q1, the residential house price in Bangkok and vicinities grew 9.9% annually 12 85 95 105 115 125 135 145 155 165 Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 Index,2002Q1=100 Housing Price in Indonesia Source: BIS 75 95 115 135 155 175 195 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Index,2001=100 Residential House Price in Malaysia Source: BIS 100 110 120 130 140 150 160 170 180 190 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 20002001200220032004200520062007200820092010201120122013 Index,1991=100 Housing Price in Thailand Source: National Authority; AMRO Staff
  • 14. Section 2 Regional Residential Property Prices • Hong Kong residential property price went up rapid from 2009 to end of the data sample • From 2010 – 2012, the private residential house price in Singapore grew 8.6% annually • From 2010 – 2012, the public residential house price in Singapore grew 7.7% annually 13 Real price index of Hong Kong residential property market from 1995M03 to 2011M03. 75 95 115 135 155 175 195 215 235 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 Index,1998Q4=100 Housing Price in Singapore (Private Resdential) Source: CEIC 75 95 115 135 155 175 195 215 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 Index,1998Q4=100 Housing Price in Singapore (HDB, resale) Source: CEIC
  • 15. Macro-Prudential Measures 14
  • 16. 15 Section 3 Macro-Prudential Measures Aims of Macroprudential Policy Macroprudential Policy Toolkit: Prudential tools aimed at reducing systemic risk that can have serious consequences for the real economy, by: Dampening the build-up of financial imbalances Building defenses & containing the speed and sharpness of downswings and their impact on the economy Identifying and addressing risk concentrations, linkages and interdependencies • The macroprudential measures can be categorized into two: - System-wide macroprudential instruments E.g. counter-cyclical capital buffers, loans quotas/caps on credit growth - Sector-specific macroprudential instruments E.g. LTV and DTI regulations, sector-specific risk-weights, loan-loss provisioning, capital or reserve requirements
  • 17. 16 Section 3 Macro-Prudential Measures Policies Undertaken by Selected Economies in ASEAN+3 Region • On the policy front, policy measures undertaken by regional economies seeks to safeguard macroeconomic and financial stability by; - Managing the large and volatile capital inflows, as well as - Pre-empting a build-up in vulnerabilities in specific sectors • The policy measures undertaken by these economies ranged from: - Macroeconomic measures (such as greater exchange rate flexibility) & conventional macroprudential policy measures (such as LTV and DTI caps) • So far, economies in the region have not deployed market-based measures such as the Tobin tax (Brazil in 2009), or unremunerated reserve requirement (Chile in the 1990s) - Rather, administrative measures such as the imposition of a minimum holding period are in-placed
  • 18. 17 Section 3 Macroeconomic and Financial Market Effects of Capital Inflows Policies Undertaken by Selected Economies in ASEAN+3 Region Measures CN KR HK SG MY TH ID PH VN Macroeconomic measures* Foreign exchange market intervention†         Changes in statutory reserve requirements   Macroprudential and Other Capital Flow Management Measures Macroprudential measures Measures refer to LTV and/or DTI caps, limit on credit growth, imposition of withholding tax & FX- related measures          Administrative measures Measures refer to imposition of minimum holding period, outright prohibition of certain transactions (such as prohibiting mortgages on third homes)   Market-based measures Measure refers to imposition of Tobin tax and unremunerated reserve requirements Liberalisation (or further liberalisation) of capital outflows     Notes: † In Hong Kong SAR, the monetary authority only conducts passive intervention in order to keep the currency board (since by rule the monetary authority has no discretionary intervention). * Other policy measures such as lowering policy interest rates and tightening fiscal policy are often undertaken in consideration of domestic demand conditions (e.g. output gap and inflationary pressure), and therefore it is difficult to render changes in such policies that are solely attributed to capital inflows. Sources: AMRO Table 4.2: Measures Undertaken by Authorities to Manage Capital Flows (Selected Economies), September 2009 to present
  • 19. 18 Section 3 Macroeconomic and Financial Market Effects of Capital Inflows Effectiveness of the Measures Adopted in Managing Capital Flows • On the prudential front, the pace at which countries adopted macroprudential policy measures only picked-up recently - Empirical evidence on macroprudential policy remains scant  The literature is mostly based on country-specific cases or event studies - This study contributes to the literature by systematically examining whether the macroprudential policy measures are working alongside other public policies  Recognising the difficulty in disentangling specific measures in achieving their policy objectives 1. Caps on banks’ FX derivatives position and imposition of macroprudential stability levy (Korea):These measures have been reasonably effective in reducing external vulnerability by (1) curbing banks’ reliance on short-term foreign exchange funding, (2) reducing the extent of foreign exchange liquidity mismatches and their links to exchange rate volatility. 2. Minimum holding period on bond investment, and limits on short-term offshore borrowing ( Indonesia): The policy has reduced the volume of portfolio debt securities into central bank bills (SBIs). The share of non-resident holdings in total SBI have fallen significantly post implementation. The build-up of offshore borrowings by banks (and other private sectors) has also moderated, albeit temporarily 3. LTV and DTI regulations on mortgage loan, and stamp tax on property transactions (Hong Kong, Singapore) : the several rounds of changes to the LTV and/or DSR limit have lowered the volume of residential property transactions, leading to a slower rate of expansion in outstanding housing loans in 1Q 2013; the price growth also moderated more in 2013Q1 from 2012Q4
  • 20. Some Caveats and Policy Recommendations 19 Section 3 Macroeconomic and Financial Market Effects of Capital Inflows • It is difficult to generalise about the effectiveness of macroprudential policy measures. • Regional country experience suggests that while they are not a panacea, they can reduce the degree of vulnerabilities of economies faced with large capital flows - Need wisdom and judgment on the part of the authorities - Macroprudential instruments, if not calibrated properly, can be easily circumvented - Macroprudential policy should be used to support, but not to substitute for other macroeconomic policies • While there are lessons to be learnt from other regional economies in their response/approach in using macroprudential toolkit, the differences in macroeconomic and financial landscape across the region necessitates some form of policy coordination at the regional level. - More frequent dialogues, perhaps through periodic updates and/or real time exchange of information on capital flow developments amongst regional central banks and monetary authorities (for example, either on a bilateral/multilateral basis through teleconferencing or other platforms) would also be helpful in ascertaining the characteristics of the capital inflows
  • 21. US QE Tapering and Capital Flows to the ASEAN+3 Region 20
  • 22. Section 4 Expectation of US QE Tapering and Reversal of Capital Flows • Expectations of US QE tapering caused uncertainty in financial markets and volatility in capital flows • Sovereign yield curve in major economies shifted upward due to uncertainty and volatility in their own domestic and global financial markets • Regional currencies are under pressure • From end March to 10 July 2013, IDR, KRW, MYR, PHP, SGD and THB fell by 2.5%, 2.2%, 2.7%, 6.1%, 2.5% and 4.6% respectively 21 0 0.5 1 1.5 2 2.5 3 3.5 4 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y US Treasury Yield Curve Present end-May 2013 end-April 2013 0 0.5 1 1.5 2 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y 40Y % JGB Yield Curve Present end-May 2013 end-March 2013
  • 23. • Regional equity markets were under selling pressure, except Japan • From mid May to 10 July, stock markets of Indonesia, the Philippines, Thailand and Vietnam lost 14%, 13%, 16% and 2% respectively • In the same period, equity markets of Hong Kong, Korea and Singapore fell by 11%, 8% and 8% respective • Saw portfolio capital outflows from the region 22 80 90 100 110 120 130 140 150 160 170 180 Aug '12 Sep Oct Nov Dec Jan '13 Feb Mar Apr May Jun Jul SG HK CN KR JP 1 Aug 2012 = 100 80 90 100 110 120 130 140 150 Aug '12 Sep Oct Nov Dec Jan '13 Feb Mar Apr May Jun Jul MY TH ID PH VN 1 Aug 2012 = 100 Section 4 Expectation of US QE Tapering and Reversal of Capital Flows
  • 24. 23 Section 4 Expectation of US QE Tapering and Reversal of Capital Flows -20 -15 -10 -5 0 5 10 15 20 25 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Debt securities Equity securities USD bn Monthly Net Portfolio Inflows: ASIAN-10 (excluding Japan) Source: EPFR -80 -60 -40 -20 0 20 40 60 80 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Debt securities Equity securities USD bn Monthly Net Portfolio Inflows: U.S. Source: EPFR -20 -15 -10 -5 0 5 10 15 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Debt securities Equity securities USD bn Monthly Net Portfolio Inflows: Euroland Source: EPFR-10 -5 0 5 10 15 20 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Debt securities Equity securities USD bn Monthly Net Portfolio Inflows: Japan Source: EPFR
  • 25. • Questions for discussion when the region is facing external and internal volatility:  What will be the macro and financial risks to the region when it is facing the US QE tapering and actual unwinding?  What should be the appropriate monetary and fiscal policies?  What should be our exchange rate and foreign reserves policies ?  How should the current macro-prudential measures be changed when facing capital outflows rather than inflows? 24 Section 4 Expectation of US QE Tapering and Reversal of Capital Flows
  • 26. Thank You 25