IMF head: hot money may threaten emerging market stability

SINGAPORE (Reuters) - The head of the International Monetary Fund said on Friday that capital flows to emerging markets reflected the positive outlook for those economies but warned that they can destabilise currencies and asset prices.

"The resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges," IMF Managing Director Dominique Strauss-Kahn said according to the text of a speech to be delivered in Singapore.

He said the flow of funds to emerging economies was a sign of renewed investor appetite for higher-risk assets as financial conditions normalise after the height of the financial crisis.

"While capital inflows are generally beneficial, they can raise risks of rapid and potentially destabilizing movements of currencies and asset prices," Strauss-Kahn said.

Giving this year's annual lecture at Singapore's central bank, he said policymakers had a range of tools at their disposal to address the adverse side-effects of such fund flows.

"They include exchange rate appreciation, tighter fiscal policy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bubbles. Market-based controls on capital inflows can help reduce the volatility of such flows," he said.

He noted that those measures were costly and tended to lose their effectiveness over time,

Strauss-Kahn's comments reflect concern among policymakers in some emerging markets that the inflow of "hot money" could create asset price bubbles and boost their currencies to levels that are uncompetitive and would undermine exports.

Earlier this week, Taiwan imposed capital controls by banning foreign funds from investing in time deposits in a move that appeared to be aimed at deterring bets on currency appreciation. Brazil last month announced a 2 percent tax on foreign investment in stocks and fixed-income securities to limit the strengthening of the real.