Logo of Phnom Penh Post newspaper Phnom Penh Post - Capital flows to Asia-6 to recover in 2021

Capital flows to Asia-6 to recover in 2021

Content image - Phnom Penh Post
As Asia-6 emerge from the Covid-19 crisis, non-resident capital flows to the region are projected to recover next year, increasing to $275 billion from the estimated $210 billion this year. PIXABAY

Capital flows to Asia-6 to recover in 2021

Among emerging-market (EM) economies, six Asian countries have stood out as major benefactors of foreign capital flows in recent years.

Calling these countries the Asia-6, comprising Malaysia, Indonesia, Thailand, India, South Korea and the Philippines, the Institute of International Finance (IIF) says they are taking up an increasingly important place on the EM investment map.

The global association of the financial industry attributes this to the region’s financial opening and the role it has played in the globalisation of goods and services trade over the past three decades.

Reflecting the increasing appeal of Asia-6, it notes, non-resident capital flows to these countries accounted for 28 per cent of total EM flows last year, compared with 20 per cent in 2010 and 12 per cent in 2000.

According to the IIF, as Asia-6 emerge from the Covid-19 crisis, non-resident capital flows to the region are projected to recover next year, increasing to $275 billion from the estimated $210 billion this year.

The IIF explains: “The Asia-6 are benefiting from better growth prospects, solid macro fundamentals, the advancement of reforms, and strong external positions.

“A new wave of Covid-19 infections, similar to current developments in Europe and the United States, and the potential need for renewed lockdowns [however] represents the main downside risk to the outlook.”

The IIF’s projection for this year is that foreign capital flows to Asia-6 would decline about 25 per cent this year amid a damped economic outlook because of the Covid-19 pandemic.

It expects foreign flows to the region to come in at $210 billion this year, compared with $282 billion last year, with the decline largely attributable to sharply lower portfolio capital inflows as well as weaker foreign direct investment (FDI).

Specifically, foreign capital flows to the region is expected to come in lower in the second half of this year, following a temporary pickup during the three months to June.

The IIF explains: “With China and the Asia-6 experiencing the first wave of Covid-19 much earlier than other regions, the capital flows picture deteriorated primarily in the first quarter of 2020 as a result of large portfolio investment outflows of $38 billion [$25 billion in stocks and $13 billion in bonds], but also showed strong signs of a rebound in the second quarter of the year when most countries around the world experienced the worst lockdown effects.

“The significantly weaker picture in the last six months of 2020 is a result of sharply lower other investment and still-muted portfolio investment, while recovering FDI plays a supportive role.”

Within the Asia-6, dynamics vary between countries, largely reflecting idiosyncratic risks, the IIF says.

India, which ranks second in the world in total Covid-19 infections, and for which it forecasts an unprecedented economic contraction of 11.3 per cent this year, is responsible for roughly half of the total decline in flows to the Asia-6 from 2019-2020, that is, a drop of $38 billion.

The Philippines, where pandemic-related lockdowns were the most stringent in the region, are expected to experience the largest drop in percentage terms, that is, down 41 per cent or $7 billion.

Indonesia, on the other hand, is in a somewhat better position, benefitting from stronger foreign purchases of domestic bonds and timely fiscal and monetary responses, the IIF says.

Nonetheless, it expects, non-resident flows to Indonesia to fall 28 per cent year-on-year to $15 billion this year.

Further contributions to the overall drop in non-resident flows to Asia-6 stem from South Korea (-$12 billion) and Malaysia ($5 billion), while Thailand is projected to see a small increase in inflows, the IIF says.

Meanwhile, FDI has been an important source of external financing for EM Asia.

The IIF says: “Inflows are attracted by the region’s critical role in global supply chains as well as large home markets.

“However, we expect FDI inflows to decline to $90 billion in 2020.

“2021 will see a full recovery of FDI to the Asia-6 as a result of improving economic fundamentals and diminishing effects of Covid-19 – coming in 10 per cent higher than in 2019 at $119 billion.”

In the medium term, the region’s positive growth outlook and a potential diversification of global supply chains away from China will continue to drive robust increases, it says.

Turning to foreign holdings of domestic government debt, the IIF projects reductions in all except in the case of South Korea.

The IIF says: “We expect foreign investors to continue to differentiate within the region on the basis of macroeconomic fundamentals, reform steps taken, and assessments of political stability.”

In general, the outcome of the US presidential election will be a significant determinant of the financial account outlook for Asia-6 next year, with trade and investment policies as the most important factor, it adds.

THE STAR (MALAYSIA)/ASIA NEWS NETWORK

MOST VIEWED

  • Cambodia to waive quarantine requirements Nov 15, no PCR test required

    Prime Minister Hun Sen has decided to lift all quarantine requirements for fully vaccinated travellers and visitors – both Cambodians and foreign nationals – effective from November 15 onward. In a special message addressed to officials and relevant authorities on November 14, Hun Sen said this policy will enable

  • PM: No more quarantine for vaccinated travellers

    Cambodia is lifting all quarantine requirements for vaccinated inbound travellers entering Cambodia by air, waterway or land border checkpoints effective from November 15. Travellers will be required to take a rapid antigen test on arrival rather than waiting for the results of the lengthier polymerase chain

  • No payment required for travellers taking rapid Covid tests on arrival

    Ministry of Health officials said there would be no payment required for the rapid Covid-19 tests given to travellers who arrive in Cambodia from November 15 onwards after the quarantine requirement is lifted for fully vaccinated people. Health ministry spokeswoman Or Vandine told The Post on

  • General’s gun smuggling ring busted

    The Military Police sent six military officers to court on November 22 to face prosecution for possession of 105 illegal rifles and arms smuggling, while investigators say they are still hunting down additional accomplices. Sao Sokha, deputy commander of the Royal Cambodian Armed Forces and commander of

  • More Cambodians studying in US

    The number of Cambodian students studying at US colleges and universities in 2020-21 increased by 14.3 per cent over the previous year despite the Covid-19 pandemic, according to a recent US government report. The 2021 Open Doors report on International Educational Exchange showed that 848 Cambodian students studied

  • Cambodia, Thailand to discuss border reopening

    Cambodian authorities from provinces along the Cambodia-Thailand border will meet with Thai counterparts to discuss reopening border checkpoints to facilitate travel, transfer of products and cross-border trade between the two countries. Banteay Meanchey provincial deputy governor Ly Sary said on November 22 that the provincial administration