Emerging nations stem capital flows

Countries from Brazil to Thailand react to currency falls as US tightens up

PUBLISHED : Friday, 14 June, 2013, 12:00am
UPDATED : Friday, 14 June, 2013, 3:49am

Emerging markets from Brazil to India took steps this week to stem an outflow of capital as concern mounted that developed nations are approaching an end to an era of pumping unprecedented liquidity into their economies.

India's central bank sold US dollars over the past two days to stem the rupee's slide, two people familiar with the matter said, while Indonesia unexpectedly raised its benchmark interest rate yesterday.

At the same time, Brazil said it would unwind some of the capital controls put in place in 2010, when the United States Federal Reserve was embarking on its second round of quantitative easing, while Thailand said it sold dollars to aid the baht.

The moves come after the Bank of Japan's decision this week to refrain from adding stimulus even after a slide in share prices that risks hurting its campaign to revive growth.

The MSCI Emerging Market Index of shares has fallen more than 10 per cent since the chairman of the US Federal Reserve, Ben Bernanke, said on May 22 that the Fed could scale back asset buying if it was confident of sustained economic improvement.

Tim Condon, the head of Asia research at ING in Singapore, said: "Markets are repricing for what we would see in a normalisation of United States treasury yields."

Overseas investors have unloaded a net US$2.7 billion from the Thai, Indonesian and Philippine stock markets so far this month, the biggest eight-day outflow since March 1999.

Brazil's government said it would eliminate a tax on currency derivatives, in an attempt to arrest the decline of its currency, which is at a four-year low.

Indonesia's surprise increase in its benchmark borrowing cost yesterday came after the central bank raised the rate it pays lenders on overnight deposits this week and said it was ready to buy government bonds from the secondary market to support the weakening rupiah. The currency gained slightly after the move, having touched 9,925 to the dollar earlier, the weakest level since September 15, 2009.

The Philippine central bank would ensure that price movements, including those in the foreign exchange market, were not excessive, governor Amando Tetangco said yesterday, before keeping the benchmark rate unchanged. Recent movements in the currency and stock markets were "part of investor reassessment of global risk", he said.

The Philippine benchmark stock index fell 6.8 per cent yesterday, the biggest drop since October 2008.

Thailand's central bank governor, Prasarn Trairatvorakul, said yesterday that a sell-off in his nation's stocks was not a surprise given a past surge. He told reporters in Bangkok that Thailand sold dollars in the past week to smooth volatility in the baht.