It is time to erect barriers against capital flows

By Kim Jae-kyoung

The government’s move to control capital flows is a step in the right direction to stabilize the local financial market and economy, according to a global economist from Natixis, one of the major banks in France.

In an email interview with The Korea Times, Luca Silipo, chief economist for Asia-Pacific at Natixis, pointed out that excessive capital inflows are the real risk for Asian countries, including Korea, citing overvaluation of currencies and rising inflation.

“The first wave of capital inflows during 2008-2009 was beneficial to Asian countries, which at that time had quite weak currencies and nonexistant inflation. So the increase of domestic liquidity that the capital inflows were creating domestically was relatively without risk in terms of excessive currency appreciation and inflationary pressure,“ he said.

“The situation today is quite different, with a general overvaluation of currencies in Asia and very clear inflationary pressures almost anywhere in Asia. It is high time that Asian countries erect some barriers against these destabilizing future capital flows in order to protect the financial stability of their economy and their people,“ he added.

As the first of a series of protective measures, the government decided Thursday to scrap the special tax exemption on foreign investment in government bonds. Under the decision, it will revive the 14 percent tax on interest income and 20 percent on capital gains for all purchases made afer Nov. 11.

Silipo expects that global investors will continue to invest in emerging markets, including Korea, depite renewed concerns over the debt trouble in Europe.

“We dont actually think that we are in the wake of a significant wave of capital outflows from Asia and of course Korea, due to the European situation. During the Greek crisis some outflows from Asia occurred. But today we think the markets might be discriminating better, “ he said.

“Investors will be increasingly discriminating and continue to see Asia and other emerging economies, such as Brazil, as a new form of safe haven. “

The former economist at the Bank of Italy said that Ireland’s debt trouble is unlikely to turn into a Europe-wide problem.

“As in the case of Greece, the sovereign problems perceived by the markets right now in Portugal and Ireland are surely not to end up in a sovereign default at least in the short term,“ he said.

“The refinancing needs of Ireland and Portugal, but also of Spain and Greece are really minor up until 2012 ― $38.1 billion for Greece, $5.4 billion for Ireland, $61.3 billion for Spain and $13.63 billion for Portugal. Moreover, the system of a safety net put in place by the European institutions together with the IMF is likely to be more than enough to cover any unanticipated shortfall.“

He, however, predicted that in the longer term (after 2015) the destiny of these countries will rely on how their economies will react to the adjustment plans that are now required by the European Institutions.

kjk@koreatimes.co.kr