Capital Flows Management During the Post-2007 Global Financial Crisis: The Experiences of SEACEN Economies

Although global financial stability in late 2010 and early 2011 has, in general, improved when compared to the 2008-2009 period of the sub-prime global financial crisis, vulnerabilities remain high. The recent World Economic Outlook of the IMF (WEO, September 2011) underlines the two speed recovery processes taking place in the world economies. In advanced economies, especially those hit hardest by the crisis, firms, government and household sectors continue to be heavily indebted and are likely to spur relatively weak demand. Although the financial markets of these economies have, in most parts, returned to profitability, the overall frail balance sheets reflect the general subdued state of the local economy. In sharp contrast, the emerging economies, including those of the SEACEN region, are posting robust growth rates until the second half of 2011, meeting new challenges associated with strong demand, rapid credit and excess liquidity. Price pressures, including potential asset price bubbles, have been the common themes of policy challenges for the SEACEN economies. Managing macro-financial risks, namely balancing growth, balance sheet soundness of the financial institutions, particularly the banking sector, and keeping a lid on inflationary pressures, have been and will likely be the primary policy challenges for these emerging markets in 2011 and 2012. This paper takes stock of recent trends and developments with regard to capital flows in the SEACEN economies. It elaborates in detail, the breakdowns and compositions of the flows. In particular, the focus of the analyses is on key flows such as the international bank lending activities to the region. The paper also summarises and analyses some of the basic push and pull factors of these flows to understand some of the domestic and external drivers of these flows. Some of the economic consequences of these capital flows and policy dilemma facing the SEACEN economies are also looked at. The paper also examines the policy responses of the central banks/monetary authorities, in particular, to mitigate the negative consequences and maximise the benefits of capital flows.