from Win Thin, Global Head Of Emerging Markets Strategy, BBH
Philippines central bank said it will use a mix of tools to manage capital inflows, since those inflows can “complicate” monetary policy. Level of concern appears low, but Governor Tetangco said that possible measures include boosting FX reserves, external debt prepayment, and easing rules on investment outflows by domestic agents. Korea’s Vice Fin Min Yim said that the government is studying measures to control capital flows, including a Tobin tax, bank tax, and leverage controls to go along with limits on derivatives positions put on in June. This comes just days after Korea Fin Min Yoon said that further measures to deal with capital inflows are being prepared. Late last night, Chile President Pinera said the government is set to unveil new exchange rate measures this week, while Brazil tightened up a loophole for foreign investors trying to bypass the higher tax on margin deposits by blocking banks from lending or swapping assets with foreigners seeking to invest in the futures market.
Where does it all end? While we have downplayed the talk of “currency wars” (since we are not seeing competitive devaluations), we do acknowledge that capital control measures do have an element of “beggar-thy-neighbor” in them. That is, if Brazil is taking measures to ward off hot money by raising the IOF tax, where does the foreign money go? Presumably to other EM countries that have a better risk/reward matrix. But then those countries will struggle with their own currency strength and will thus be tempted to take Brazil-type measures too. That is where we may be headed, with more and more countries expected to erect capital controls to help limit currency appreciation.
We feel that the possibility that some sort of coordinated solution to this problem will be put forth by the G-20 is unlikely. US officials are reportedly pushing for the G-20 to agree on a statement of FX cooperation, but we read this as really focusing on the China issue. Indeed, Geithner said today that the major currencies are “roughly in alignment now.” As a reminder, G-20 consists of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Korea, Turkey, the UK, the EU, and the US. As long as the US, euro zone, Japan, and the UK are running loose monetary policy, there is not much policy-makers as a group can do to discourage this fundamental and liquidity-driven trade. As a result, it appears that most countries are willing to continue taking unilateral measures.