Spend those Treasury bonds, Asian Development Bank urges

Asian Countries Warned
on Danger of Reserves

By Michiyo Nakamoto
Financial Times, London
Tuesday, November 27, 2007

http://www.ft.com/cms/s/91c70136-dc8d-11db-a21d-000b5df10621.html

TOKYO -- Asia's developing economies are fuelling asset bubbles with their huge foreign currency reserves and could put them to better use by retiring debt or buying higher-yielding investments, the Asian Development Bank said on Tuesday.

Ifzal Ali, ADB chief economist, said the current level of reserves held by Asian developing economies -- $2,280 bilion -- was excessive.

"These reserves, unless sterilised, lead to increases in money supply, which in turn, lead to bubbles in assets," Mr Ali said. "Across the region, we are seeing asset bubbles both in housing and equity markets."

Mr Ali suggested that Asian developing countries use their reserves for retiring debt, investing in infrastructure, or providing funds for social needs.

He added that returns could be boosted by investing in equities or other instruments, rather than focusing heavily on US Treasuries and eurozone bonds.

By investing even half their reserves in instruments yielding an extra 500 basis points such countries "would generate a $50 billion fiscal dividend equivalent to about 0.8 percent of regional GDP," Mr Ali said. He said developing Asian countries should follow the example of Singapore, South Korea, and China to put together investment plans.

"By most measures, countries are holding reserves far in excess of those they need to cover short-term maturing foreign exchange liabilities, plus any demands that may come from internal sources," he said.

South Korea's setting up of the Korean Investment Corp. and China's decision to more actively manage more than $1,000 bilion in reserves, are steps in the right direction, Mr Ali said. "It is a step all countries in the region will move toward over the next two to three years."

But Mr Ali said Asian countries needed to be aware of risks involved in more aggressive reserve management.

"These are not risk-free," he said.

"I think both governments and central banks will be quite cautious on the pace at which they will pursue this particular initiative."

Mr Ali's recommendations came as the Asian Development Bank launched its Asian Development Outlook for 2007, saying that growth, though robust, would decelerate after recording the fastest rate for more than a decade last year.

The ADB forecasts developing Asian economies will expand by 7.6 percent this year and 7.7 percent in 2008, compared with 8.3 percent in 2006.

Rapid growth in China and India accounted for 70 percent of growth in the region last year. But the ADB expects this growth to moderate this year.

China's growth, which hit 10.7 per cent last year, is likely to slow to 10 percent this year and 9.8 percent in 2008. India's growth, which hit 9.2 percent last year, is forecast to decline to 8 percent this year and 8.3 percent in 2008.

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Additional reporting by Reuters.

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