2nd OECD-AMRO Asian Regional Roundtable

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