ADB chief economist urges more active forex reserve investment

Asian governments and central banks should invest their foreign reserves more actively in financial markets so they can use the returns to develop their economies and reduce poverty, the Asian Development Bank's chief economist says.

''Today, under very conservative estimates, about 50 percent of reserves that are held by developing Asia are in excess of what would be required under very adverse conditions,'' Ifzal Ali said, casting doubt on the current situation in which a major part of those reserves are held in ''very low-yielding U.S. Treasuries and euro bond issues.''

Developing countries in Asia should benefit from setting up government-affiliated investment corporations to invest excess reserves in global financial markets, he said in an interview with Kyodo News on Monday. But he said such a move would take time due to their fears of taking risks that may hurt their credibility.

Ali, who was in Japan to present the ADB's annual development outlook report for 2007, said foreign reserves held by Asian countries other than Japan have sharply increased due to traumas from the 1997 currency crisis in the region.

Developing Asian countries had $497 billion in reserves at the end of 1997. The amount has so far increased to $2.3 trillion, of which over $1.1 trillion is in China, the biggest holder followed by such economies as India, South Korea, Hong Kong and Singapore, he said.

Asian countries have created a ''firewall to insulate themselves from financial contingents'' by building up foreign reserves, Ali said. But they all have been reckoning that ''this has been greatly overdone,'' he said.

Given many of Asian currencies appreciating recently, he said that ''in domestic currency term, you are losing money...It's in this context that India, (South) Korea, China are all considering options of how to more actively manage their reserves.''

Last month, Chinese authorities said they are to set up a state agency to actively manage part of China's huge foreign reserves through investments in financial markets.

In Singapore, meanwhile, the Monetary Authority of Singapore is in charge of the country's foreign reserve management but the Government of Singapore Investment Corp. manages part of the reserves like an investment fund.

Ali argued such moves could lead to further development and prosperity in Asia.

''If other countries also pursue this route and one assumes, for the sake of argument, that you can make 5 percent higher return through the active management of your resources, then this would lead to an additional approximately $60 billion,'' he said.

''And it will enable governments to employ a variety of reasons to reduce debt (and) increase fiscal space, investing in social infrastructure...It's a lot of money,'' Ali added.

However, he said things ''cannot be done overnight,'' pointing out that governments and central banks in developing Asia should first take time in their efforts to accumulate expertise on the management of foreign reserves.

Ali said there are deep-rooted fears over taking risks in active investments because ''if something goes wrong, credibility of a government and central bank will be adversely affected.''

''So I would expect most countries will hasten very slowly in this regard,'' he said.

Asian Economic News, April 2, 2007