Asia’s emerging economies told to be on their guard

The Philippines and other emerging economies in the region should be on their guard against any volatility in foreign capital inflows that may arise from a mild recession in the euro zone, according to Asian Development Bank.

The probability of “large swings” in foreign capital flows should not be discounted, that is why emerging markets in Asia must have measures in place to protect their economies, ADB said.

The multilateral institution said it would be advisable for Asia’s emerging markets to discuss among themselves common policies that they could implement to minimize risks brought on by huge fluctuations in foreign capital flows.

“If large swings of capital flows to the region reoccur, various measures of capital flow management may be deployed, but they require regional cooperation to be effective,” ADB said in its report, “Asian Development Outlook 2012.”

Foreign capital flows, especially portfolio funds, tend to turn volatile in times of global economic uncertainties.

The problems now gripping most advanced economies in the West may prompt foreign fund owners to put their money in Asia’s emerging markets. But a prolonged crisis in the West, which will dampen outlook on the global economy, may also prompt foreign fund owners to pull out their cash from emerging markets and stay on the sidelines.

Any sharp movements of foreign capital will also affect exchange rates. Fluctuating rates tend to disrupt operations of businesses, particularly those that engage in import or export.

ADB said Asian central banks should have the necessary measures in place to avoid the disruptive effects of sharp movements in capital flows.