The Korea Herald

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‘Asia faces destabilizing capital inflows’

By 김주연

Published : April 12, 2011 - 18:44

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Credit Suisse regional chief says inflationary pressure won’t continue


Inflationary pressure from soaring food prices is not likely to continue in Asia but a new round of capital inflows from May could destabilize regional economies, said Osama Abbasi, CEO of Credit Suisse Asia-Pacific.

“It is in our view that food price is pretty much capped out. Further acceleration of food price is unlikely,” Abbasi said in an interview on the sidelines of an annual conference by the Financial Supervisory Service.

The Asia-Pacific head of the Zurich-based investment bank said its survey of 2,000 institutional investors and hundreds of corporations resulted in the forecast that capital inflow into emerging markets will resume in late May. Rapid investment capital inflows into countries experiencing inflationary pressure spurs further price advancements and risks turning the economy into an overheated one.

“In the first six to seven weeks between mid-January to March in Asia, there was about $8 -10 billion of outflows from emerging Asia into developed market. Our poll, conducted on Mar. 21 shows this would reverse in two months time, which would be May 21,” Abbasi said. 
Credit Suisse Asia-Pacific CEO Osama Abbasi (FSS) Credit Suisse Asia-Pacific CEO Osama Abbasi (FSS)

The inflation fight has been the government’s top policy priority for the past half-year after the consumer price index exceeded its target rate of 2 to 4 percent for the past seven months. The CPI jumped 4.7 percent in March from a year ago, recording the fastest price acceleration in 29 months since October 2008.

Food prices, however, went down with the onset of the spring weather. According to the retail industry, prices of staple vegetables including green chili, eggplant and lettuce dropped by 62.7 percent, 53.1 percent and 29.7 percent respectively, from the same time last year.

Abbasi praised the Korean financial regulators for having pulled the market quickly out of the slump in the recent years. He pointed to the loose monetary policies of advanced nations as policy challenges facing Korean officials.

“With a lot of liquidity thrown into the system with the QE2, they need to go somewhere. And this creates a very challenging environment for Seoul.”

QE2, or the second round of quantitative easing, is a strategy of liquidating the market deployed by the U.S. Federal Reserve.

The Fed’s decision to keep short-term interest rates at near zero with a trillion dollars of bond purchase drives capital into emerging markets where yields are higher.

The International Monetary Fund projects Korea to experience 4.5 percent inflation this year, which sits at the upper end of its average for industrialized emerging economies at 4.7 percent. The Bank of Korea froze the benchmark interest rate at 3 percent at its review meeting Monday.

The watchdog hosted its third annual conference “FSS speaks” to better communicate with foreign financial institutions operating in Korea. The 300 attendees included chief executives of financial institutions, including Abbasi, John Walker of Macquarie Korea, Richard Hill of Standard Chartered First Bank Korea and Michel Peretie, Corporate and Investment Banking CEO of Societe Generale.  

By Cynthia J. Kim (cynthiak@heraldcorp.com)