Reversal of capital inflows may be disruptive – analysts

MANILA, Philippines - The reversal of capital flows in the Asia-Pacific region may be “disruptive” as this may increase funding costs and exchange rate volatility, Standard & Poor’s analyst said.

“Most sovereigns are likely to see economic growth weighed down somewhat by modest-to-moderate increases in funding costs,” Kim Eng Tan, S&P credit analyst said in a statement.

“The strain is likely to be greater in economies that run sizable current account deficits or have inflexible exchange rates,” Tan added.

Emerging economies were considered safe havens by investors amid a downturn in the US economy and the lingering debt crisis in the euro area. However, an improving US economy and the current stability in the euro zone have been causing the flight of capital from emerging markets.

“If capital inflows slow much more than we expect, the cost of financing may unpleasantly surprise borrowers,” Tan said.

At the same time, S&P warned that some policy responses to mitigate the effect of the capital flight may surprise investors and hurt the economy more.

“Negative policy surprises from an-xious governments could hurt investor confidence and worsen credit conditions much more than we expect in some economies,” S&P said, in a separate report titled “For Asia-Pacific Sovereigns, Capital Outflows Are Likely To Be Disruptive But Not Destructive.”

Despite concerns on financing costs and foreign exchange volatility, the debt watcher said economies in the Asia-Pacific region are expected to weather economic problems brought about by capital flight.

“Governments that had warily allowed foreign capital into their economies not so long ago now worry about a sharp reversal of these flows,” S&P said.

The firm added it “expects most sovereigns to weather this without a sharp slowdown in economic growth or prolonged financial volatility.”