Dec 1, 2009

Asset bubbles all over Asia: UN economist

They may burst if short-term capital flowing in pulls out

By Fiona Chan

GOVERNMENTS have been urged by a top United Nations economist to keep an eye on asset bubbles, which he says are appearing all over Asia as investors pour money into the rapidly recovering region.

UN Assistant Secretary-General Ajay Chhibber also cited the woes faced by Dubai, in the Middle East, as an example of how the underlying issues of the financial crisis had not been solved.

'I see bubbles in many, many Asian countries,' he said during a visit to Singapore yesterday.

He was speaking to reporters at a press conference at the Institute of Southeast Asian Studies after releasing a UN Development Programme (UNDP) report on how the global financial crisis has affected the Asia- Pacific.

'The strengthening of the equity markets in most Asian countries is clearly a signal of fairly substantial inflow of capital coming in,' said Mr Chhibber, a former World Bank senior economist. 'It's Asia-wide, with some exceptions.'

While it is fine if the capital is used for long-term investments, the worrying thing is that some of the inflows are short term and volatile, he said.

Developed countries have relaxed their monetary policies in response to the recession, making liquidity readily available, but this means the money will quickly flow out again when these policies are eventually reversed.

Once the liquidity is withdrawn, the bubble may burst - similar to the situation in Dubai, where one of the government's flagship entities is threatening to default on US$59 billion (S$81 billion) of debt, Mr Chhibber said.

While the size of Dubai World's debt is 'not significant enough to have a major impact', the default is a signal that the underlying factors that caused the financial crisis have not been solved.

These problems have been temporarily papered over by the huge stimulus spending rolled out by governments, but how long that can continue is a question mark, he noted.

'The balance sheets are still heavily debt-laden, and therefore a small shift in expectations or investor sentiment can really turn things,' he said.

'When the tide starts to go out again, you will see where the rocks are.'

For Asia to remove those rocks and embark on a sustainable growth path, the region must undergo fundamental changes, said Mr Chhibber, who is also the director of the UNDP's regional bureau for Asia and the Pacific.

'If Asia wants this to be its century, it must more vigorously find an alternate development path away from its old export-led growth model.'

In introducing the UNDP report, which he co-authored with UNDP senior policy adviser T. Palanivel and Professor Jayati Ghosh of India's Jawaharlal Nehru University, Mr Chhibber laid out six areas where he said governments have to do more.

To tackle asset bubbles, they must put in place better tools to manage capital flows, he said. 'Property markets are also extremely frothy all across Asia but with capital which could easily reverse.'

Second, they have to rely less on export demand and develop greater domestic demand by spending more and encouraging households and businesses to do the same.

Governments should also invest more to make sure that poorer members of the population benefit from economic growth as well, so as to minimise the effects of income inequality, he said.

This ties in with the fourth aim of providing better social protection for the needy, with more government spending on health care and more extensive social insurance programmes, including pensions and unemployment insurance.

Cleaner and greener growth is a fifth area of focus. Even as developing countries power ahead, there needs to be a shift from heavy coal and oil usage to solar, nuclear and renewable energy, he added.

Lastly, intra-regional trade in Asia should be expanded, which would help smaller economies especially.

In Singapore, for instance, domestic demand can never hope to substitute for external markets, but Asean can provide a bigger market and a stronger economic base to help buffer external shocks.

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