Oecd amro s1 01_amro dr matthew yiu

0

Second OECD-AMRO

Joint Asian Regional Roundtable

Global Liquidity, Capital Flows, Asset Price Movements and Macro-prudential Measures in the

ASEAN+3 Region

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 BOE BOJ

• 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)

2

Quantitative Easing in Major Economies and Capital Flows to the Region

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

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


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


Evolution of Main QE Instruments Across Time & Behaviour of Capital

Flows into the Region

6

Section 2


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

Macroeconomic and Financial Market Effects of Capital Inflows

7

Stylized Facts about Capital Flows into the Region

8

Section 2


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

9

Section 2


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


10

Section 2


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

11

Section 2


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


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

Ind

ex,

20

02

Q1

=10

0

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

Ind

ex,

20

01

=10

0

Residential House Price in Malaysia

Source: BIS

100110120130140150160170180190

Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4

20002001200220032004200520062007200820092010201120122013

Ind

ex,

19

91

=10

0

Housing Price in Thailand

Source: National Authority; AMRO Staff

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

Ind

ex,

19

98

Q4

=10

0

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

Ind

ex,

19

98

Q4

=10

0

Housing Price in Singapore (HDB, resale)

Source: CEIC

Macro-Prudential Measures

14

15

Section 3


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

16

Section 3


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

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Section 3


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

18

Section 3


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

Some Caveats and Policy Recommendations

19

Section 3


• 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

US QE Tapering and Capital Flows to

the ASEAN+3 Region

20

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

• 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


23

Section 4


-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


Debt securities

Equity securities

USD bn Monthly Net Portfolio Inflows: U.S.

Source: EPFR

-20

-15

-10

-5

0

5

10

15


Debt securities

Equity securities

USD bn Monthly Net Portfolio Inflows: Euroland

Source: EPFR -10

-5

0

5

10

15

20


Debt securities

Equity securities

USD bn Monthly Net Portfolio Inflows: Japan

Source: EPFR

• 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?

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Section 4


Thank You

25

Oecd amro s1 01_amro dr matthew yiu

Economy & Finance

residential

financial

main qe instruments

hong kong

exchange market

gross portfolio

gross capital

minimum holding