How Volatile Capital Flows and Increasing Credit Could Lead to Another Crisis in Asia

In: Business and Management

Submitted By rocky311
Words 617
Pages 3
How volatile capital flows and increasing credit could lead to another Crisis in Asia
We have seen since the global financial crisis that there has been a surge in capital from the developed world to the developing world. As returns rates are lower in the developed world due to expanding monetary policy, more opportunity for higher investment is overseas. This increase in liquidity to the emerging Asian market has several implications if not managed could have drastic consequences.
As the Asian market is experiencing rapid domestic growth, higher international credit flows into the region tends to hamper the ability of policy makers to constrain credit, especially if most of the credit is extended from foreign institutions.
This has concerns as if local firms and households shift from domestic currency liabilities to avoid possible monetary tightening; it could negate the ability of domestic monetary policy makers. This in turn exposes domestic firms and households to currency risk. (Avdjiev, McCauley, & McGuire, 2012). This is a concern as this can affect the exchange rate as borrowers exchange foreign for domestic currency for the purpose of purchasing domestic goods affecting the trade balance of Asian economies.
If we look at the impact of the western worlds monetary policy on Asia, the imminent reduction of quantitative easing in the US could lead to a retraction of investment. This could seriously lead to a deterioration of growth and a problem of paying short-term debt. The Asian Development Bank said, “The region’s ratio of short-term debt to total external debt is almost 65%, much higher than other emerging regions, where the corresponding figure is generally below 50%” (Ponnudurai, 2013). This outflow could serious affect the ability of Asia to pay its bills in the short term as in a crisis; short-term debt is the first to be pulled making it a…...

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