global liquidity

The past years are years of high global liquidity. G-3 interest rates are at historically low levels. Huge amount of Asian money moves to US treasury bills, while US capitals move to Asian and Latin American equities. Both the developed and developing countries are benefitted from this high liquidities. Indeed, it is a good opportunity for the developing countries to explore the benefits.

In the past, those countries have high external debts, denominated in foreign currencies. They have kept the currency from depreciation in order to avoid the currency mismatches. They accumulated international reserves to support their FX.

With today's high liquidity, and low yield in the developed countries' debt instruments, money pours into their markets. By keeping their exchange rate from appreciation, they are able to accumulate international reserves to very high levels. Sterilzation together with relaxation of domestic debt market participation by foreigners, money are poured into local markets. As a result, they are able to develop their domestic yield curve. Partly because of the local yield curve benchmark, some of the countries are now able to issue their debts in the international market denominated in their own currencies.

This financial development are complemented with the strong regional growth in Asia. China and India's demand for raw materials push up global commodity demand. Commodity exporting countries like Chile, Russia, etc. are all winners.

Of course, policies are pursued diffferently than in the past as well. Partly because strong global demand and partly because governments realized the importance of fiscal discipline, their public balance are mostly in control. Inflation targeting are mostly adopted and viewed credibly by investors. Their domestic economies are now more stable than before. Public and private balance sheets are much improved.

So, with the internal and external environment supports, many emerging economies are able to put their houses in shape. Now, external risks are lower than before. They worry more FX appreciation than depreciation. They worry too much capital inflow more than capital outflow. They worry too much international reserve more than too little international reserve. They worry the crisis from the slow down of US economy than from their own economies.

So, what now? Emerging economies need to put their softwares in order. Transparency is needed to make the financial market more efficient and liquid. Recent Thailand's capital control is one interesting example. It illustrates the thai government realized too much capital inflow may not be good, reflecting the fact that its financail market development has not matured enough. It is easy to build tangible assets like buildings. But build a intangible asset like management skill and corporate goverance takes much longer. More importantly, it is harder to detect the weakness of an intangible asset than the weakness of a tangible.