According to analysts at ING, select Asian countries are mulling over the prospect of raising capital market constraints in order to stave off any near-term financial crises.
Key highlights
Malaysian, Indonesian and Thai officials are raising the prospect of using pre-emptive capital controls to stave off financial crises. This is not necessarily unreasonable.
ING notes that the majority of economists agree that free trade is better for wealth creation than restrictive trade, and more trade tends to be better for everybody than less trade. That being said, capital markets are not necessarily structured the same as physical trade, even though major financial bodies like the International Monetary Fund tend to run on the assumption that the cases are identical.
Despite a growing number of ASEAN nations looking at implementing pre-emptive capital controls in the face of growing potential for any number of financial downturns globally, ING posits that Malaysia’s suggestions to pre-emptively ring-fence the Ringgit have worked reasonably well in the past, and the ASEAN sector may see more capital restraints to come in the near future.
This raises all sorts of interesting questions like, when do you opt to implement them? Is the Fed tightening one of the factors that might lead ASEAN central banks to implement such controls? Why not just try to limit hot capital inflows if you are worried about subsequent outflows? And hasn’t Malaysia’s capital account, which is far from free and open, got enough controls already? None of which I intend to answer here. All I will say in conclusion is that this initiative is not necessarily and intrinsically harmful to the economic prospects of the countries advocating it. Some version of this proposal might, under some circumstances, have some economic merit. – ING’s Robert Carnell
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