Transcript Document

Bolstering the Surveillance of Regional Capital Flows
Some out-of-the-box ideas
By
Huzaime Hamid, Malaysia
For NEAT Working Group on Intra-regional Exchange Rate Stability and Prevention of Financial Crisis
in East Asia, Tokyo, Japan
30 June, 2006
Definitions:
1.
Oxford / Reader’s Digest Complete Wordfinder:
“…close observation, esp. of a suspected person, syn. Watch,
scrutiny, reconnaissance….”
2.
IMF:
“One of the core responsibilities of IMF is to maintain a dialogue with its
member countries on the national and international repercussions of their
economic and financial policies.This process of monitoring and consultation
is normally referred to as “surveillance”, though there is nothing clandestine
about it. Indeed, the consultation process has become increasingly open to
public scrutiny in recent years.” (2003)
3. ADB:
“….assist the developing member countries of ADB – both individually and
collectively – to harness the full benefits of global financial integration and
international capital flows while at the same time minimizing any disruptive
effects.” (2003)
Source: IMF and ADB Perspectives on Regional Surveillance in East Asia, Brouwer
Frameworks for the APT Surveillance Process
Manila Framework (November 1997 – 2004) – to create a framework for regional
cooperation to enhance the prospects for financial stability. It established a
mechanism for regional surveillance, complementary to IMF’s global
surveillance.
2. APT Finance Ministers’ Meeting – for Finance Ministers to discuss financial and
currency issues in East Asia.
3. Informal APT and Central Bank Deputies Meeting (Informal AFDM+3) – for
mutual surveillance and exchange of views on macroeconomic and structural
problems. ADB supported.
4. APEC Finance Ministers’ Meeting – to discuss economic issues related to
macroeconomics and capital flow issues.
5. ASEM Finance Ministers’ Meeting – to strengthen linkages between Asia and
Europe and to progress further economic and financial cooperation.
6. EMEAP Governors’ Meeting – to strengthen cooperative organization between
central banks and monetary authorities in East Asia and the Pacific.
Cont’d….
1.
…cont’d
7.
SEACEN Experts’ Group on Capital Flows – to develop regional
framework for information sharing on capital flows & to draw up
implementable proposals to enhance the management of capital flows.
8.
ASEAN Surveillance Process – organized around the ASEAN
Surveillance Coordination Unit. Prime objectives are to strengthen
cooperation by (i) exchanging information and discussing economic &
financial developments among members, (ii) providing a peer review and
early warning system to enhance regional macroeconomic and financial
systems stability, (iii) highlighting possible policy options & encouraging
early actions to prevent a crisis, (iv) monitoring & discussing global
financial and economic developments, its regional impact and any
necessary actions thereto.
9.
ADB REMU – facilitate integration of member ADB countries into
global economy so they can harness benefits at minimal costs. Supports
surveillance process through studies on regional integration & monetary
and financial cooperation.
10.
ADB ARIC – started as a (crisis) recovery center but now provides
information on economic and social developments, financial & corporate
restructuring initiatives, and structural reforms.
Source: Report Summary of Studies on “Economic Surveillance and Policy
Dialogue in East Asia”, IIMA, 2005
Four main risks for foreign investors:
1.
2.
3.
4.
Debt maturity mismatch risk
Currency mismatch risk
Capital structure mismatch risk (constant coupon payments in declining
FX value & cashflow stress periods)
Solvency risk (Liabilities > Assets)
Source: IMF Balance Sheet Approach to Financial Crisis Prevention &
Resolution, Hofer, 2002
Key IMF Surveillance & Crisis Prevention Measures
1.
2.
3.
4.
5.
6.
7.
8.
9.
Financial sector assessment programme – assesses a country’s financial system)
Country surveillance (under Article IV consultations) – annual review of the
country as a whole
Regional surveillance – assessment of monetary unions (e.g. EU, ECCU, WACU,
EACU)
Multilateral surveillance – through World Economic Outlook and Global Financial
Stability Report
Reports on the Observance of Standards and Codes – mainly on best practices on
fiscal policy
Special Data Dissemination Standards – national economic indicators
Debt Sustainability Analysis – tests on the serviceability of national debt
under shock
Balance Sheet Approach – Vulnerability assessment due to currency or maturity
mismatches
Technical Assistant and Regional Institutes – Assistance and education on
systems relevant to economic and monetary policy
Source: IMF Balance Sheet Approach to Financial Crisis Prevention &
Resolution, Hofer, 2002
IMF Special Data Dissemination Standards (‘SDDS’) covers:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
National accounts, nominal, real & associated standards – quarterly
Production indices – monthly & quarterly
Labor markets – quarterly
Prices indices – monthly
General government/public sector operations (special framework provided) – annually
Central government operations – monthly
Central government debt – quarterly
Analytical accounts of the banking sector (specially framework provided) – monthly
Analytical accounts of the Central Bank – monthly; weekly encouraged
Interest rates – daily
Stock market movements – daily
Balance of payments data (special framework provided) – quarterly
International reserves and foreign currency liquidity – monthly; weekly encouraged
Merchandise trade figures – monthly
International investment positions – annually; quarterly encouraged
Exchange rates – daily
External debt – quarterly
Socio-economic indicators – annually
Source: IMF website 9/6/2006
Key weaknesses of the IMF SDDS appear to be:
1.
Infrequency – capital flows happen daily.
2.
Daily capital flows from one country to another not well captured, rather a
static picture of account balances is taken
3.
The amount of foreign capital and ownership structure within a nation,
especially the flighty sort, appears to not be captured specifically either.
4.
The set appears to be more a test of a country’s credit-worthiness rather
than its temporal experience with capital flows.
COURSE OF A FINANCIAL CRISIS
- ECONOMY WITH SECTORAL BALANCE SHEET MISMATCHES
(Source: Rosenberg, IMF)
Exchange rate
Depreciation
Attempt to stabilize
exchange rate
Reversal of
Capital flows
Interest rate
Increase
Exchange Rate
Shock
Loss of
confidence
Rollover shock
Interest Rate
Shock
Economy with mismatches
Government
Banks
Spillovers
Corporations and Households
To fully anticipate capital flows, surveillance needs to include:
1.
Knowledge of amounts of flighty capital in a domestic system
2.
Strategic asset allocation and country calls by fund allocators and strategists in
capital markets
3.
Changes in fund benchmark indices
4.
Changes in sovereign, foreign exchange, and major corporate debt issue ratings
5.
Movements of capital across borders
6.
Hedge fund positions on a regulated disclosure basis
Global assets under management (USD trillion as at end 2003):
International Banking Assets
International Debt Securities
Insurance Companies
Pension Funds
Investment Companies
Hedge Funds
Other Institutional Investors
Total Funds under Management
Memo Item – OTC Notional Derivative Contracts
GRAND TOTAL
23.6
14.6
13.5
15.0
14.0
0.8
3.4
84.9
270.1
355.0
Or, some 44 times ASEAN+3 2004 GDP, and some 8.6 times the world’s 2004 GDP.
MSCI World Index benchmark weight for APT 15.51% (as at 7 May 2006)
Source: Exchange Rate Regimes and Global Imbalances, Sheng, 2006, BIS, IMF
Main Types of Global Flows:
• World trade in goods & services in 2004 USD 11 trillion
•FDI flows of USD 648 billion in 2004
•FPI flows of USD 4.2 trillion in 2004 (CPIS data for top 10)
•Gross daily turnover of FX of USD 1.9 trillion in 2004 (BIS Triennial Survey 2004)
•Derivatives trading of USD 5.7 trillion daily (BIS Triennial Survey 2004)
Source: Exchange Rate Regimes and Global Imbalances, Sheng, 2006
2004 World Market Size
USD Billion
Total Reserves minus Gold (FT market proxy)
3,865.6
Stock Market Capitalization
37,168.4
Total Debt Securities
57,842.9
Commercial Bank Assets
57,315.8
Total Global Markets
156,192.7
Total Global Markets / World GDP
3.78x
Total Portfolio Moneys / Total Global Markets
2.27x
Source: IMF Global Financial Stability Report, 2006
Key quantitative capital flight trigger-points for fund managers (based on the
1997 / 98 Asian Financial Crisis:
• > 1.5% trade deficit / GDP
• > 3% federal government budget deficit / GDP
• > 100% banking system loans to deposits ratios
• > 3 x debt to equity ratios of major corporations
• > 20% per annum M2 growth
• < 3 months import cover on FX reserves
Key qualitative capital flight trigger-points:
• Domestic banking system and management thereof seen as weak
• Presence of structured currency depreciation
• “Excessive” property and asset prices, usually based on YoY price increases
• “Large” amounts of short term debt to be redeemed in the near future
• High corruption (proxied by Transparency International’s Corruption Index rating)
Key point is the risk tolerance of individual fund managers; however,
they will beat feet once the herd starts going the other way. It is a game
of perception and follow-the-crowd.
A typical re-weighting exercise
Using the MSCI World Free Index (as at 7 May 2006) country weightings as a benchmark,
A drop of 10% in say, the US market, necessitates a selling of non-US assets to re-weight
Back to following the benchmark:
Benchmark
Weight
%
USA
Japan
Korea
Greater China
Singapore
Malaysia
Indonesia
Thailand
Philippines
Rest of World
45.08
10.98
1.31
2.38
0.37
0.20
0.12
0.12
0.03
39.41
Portfolio Weights
After 10% US drop
40.57
11.50
1.37
2.49
0.39
0.21
0.13
0.13
0.03
41.27
Portfolio %
Total sell-off
N/A
1.15
0.14
0.25
0.04
0.02
0.01
0.01
0.00
4.13
Portfolio Weights
Post Adjustment (%)
45.08
10.98
1.31
2.38
0.37
0.20
0.12
0.12
0.03
39.41
For every USD1 bn invested this way, a 10% drop in the US market requires a sell-off of
USD15.5 mn in APT markets to maintain a “benchmark-neutral” weighting. There are
USD84.9 trillion worth of funds under management globally, not including the value of OTC
contracts which could exacerbate the problem.
How quickly can it turn?
Main indices & currencies
30 Dec 05
28 Apr 06
% Change Period
Japan Nikkei
Yen vs. USD
16,111.43
117.48
16,906.23
114.17
4.93
2.82
KOSPI
Won vs. USD
1,379.37
1,007.30
1,419.73
943.20
2.93
6.36
China Shanghai
Yuan vs. USD
1,161.06
8.0702
1,440.22
8.0140
24.04
0.70
ST Index
SGD vs. USD
2,347.34
1.66
2,610.71
1.58
11.22
4.79
SE Thailand
Baht vs. USD
713.73
41.06
768.29
37.53
7.64
8.60
Jakarta Composite
Rupiah vs. USD
1,162.64
9,831.00
1,464.41
8,806.00
25.96
10.43
Philippines Composite
Peso vs. USD
2,096.04
52.9850
2,270.53
51.7950
8.32
2.25
KLCI
Ringgit vs. USD
899.79
3.7793
949.23
3.6255
5.49
4.07
UK FTSE 100
Pound vs. USD
5,618.80
1.7232
6,023.10
1.8084
7.20
4.94
US DJIA
10,717.5
11,367.1
6.06
The next 10 weeks…..
Main Indices & Currencies
28 Apr 06
15 June 06
% Change Period
Japan Nikkei
Yen vs. USD
16,906.23
114.17
14,470.76
114.92
-14.41
-0.65
KOSPI
Won vs. USD
1,419.73
943.20
1,219.40
959.60
-14.11
-1.71
China Shanghai
Yuan vs. USD
1,440.22
8.0140
1,533.98
7.9990
6.51
0.19
ST Index
SGD vs. USD
2,610.71
1.58
2,302.43
1.5920
-11.81
-0.75
SE Thailand
Baht v.s USD
768.29
37.53
648.51
38.39
-15.59
-2.24
Jakarta Composite
Rupiah vs. USD
1,464.41
8,806.00
1,241.65
9,395.00
-15.21
-6.27
Philippines Composite
Peso vs. USD
2,270.53
51.7950
2,081.80
53.135
-8.31
-2.52
KLCI
Ringgit vs. USD
949.23
3.6255
886.48
3.6520
-6.61
-0.72
US FTSE 100
Pound vs. USD
6,023.10
1.8084
5,590.70
1.8471
-7.18
-2.09
US DJIA
11,367.1
10,816.92
-4.84
Prevention is better than cure. A strong foundation helps calm capital markets.
Knowledge is the key.
Key Recommendations:
1. Capacity building in both institutions and human capital needs to be undertaken and/or
intensified. Possible ambit – Informal AFDM+3, EMEAP Governor’s Meeting, SEACEN Experts’
Group on Capital Flows, ASP, and ADB’s ARIC.
2. Good “glocal” standards, codes, best practices, and transparency in operations needs to
be put into place as confidence building measures. Possible ambit as above, including ADB’s
REMU.
3. Financial and monetary governance needs further development and to be made more
effective. Possible ambit of Informal AFDM+3, EMEAP Governor’s Meeting, and SEACEN
Experts’ Group on Capital Flows.
4. The surveillance mechanisms currently in place needs to have its data re-examined;
capital flows data especially that of portfolio capital, needs to be exchanged on a daily
basis. This could be the start of an “early warning” system. Possible ambit of Informal AFDM+3,
EMEAP Governor’s Meeting, SEACEN Experts’ Group on Capital Flows, ADB’s ARIC, ADB’s
REMU, and ASP.
5. Hedge fund activity, derivatives markets, and private equity flows need proper monitoring and
regulation. Such needs to be done on a global basis and should include, inter alia, banks, private
equity houses, and especially, the OTC derivatives markets. Possible ambit of Informal AFDM+3,
EMEAP Governor’s Meeting, SEACEN Experts’ Group on Capital Flows, ADB’s ARIC, ADB’s
REMU, and ASP.
23/6/2006