Hot Money , It's Impact On Emerging Countries !

[BobbyFischer]

When hot money flows into an emerging country it can create spectacular rises in equity markets. However when the flow of hot money reverses course, the inevitable crashes will be terrifying as well.
[b]The following chart shows the performance of the Thailand IFC Investable Index from 1988 to 2000:[/b]

[url="http://topforeignstocks.com/wp-content/uploads/2011/09/Thai-Market-Returns.png"][img]http://topforeignstocks.com/wp-content/uploads/2011/09/Thai-Market-Returns.png[/img][/url]
In the early 90s, due to high interest rates and strong growth, Thailand and other East Asian countries received large flows of hot money and experienced a dramatic boom in asset prices.
From [url="http://www.twnside.org.sg/title2/ge/ge15.pdf"]Hot Money and Capital Controls in Thailand[/url] by Third World Network:[indent]
Fixed exchange rates also encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. A fixed exchange rate regime, free capital mobility, inept regulatory authorities, a weak financial sector as well as reckless behaviour of both borrowers and lenders all combined to render the Thai economy extremely vulnerable to external financial shocks. In 1996, the global economic environment started to change. As the US economy recovered from a recession in the early 1990s, the Federal Reserve began to raise interest rates to head off inflation, making the United States relatively more attractive as an investment destination. At the same time, Thai export growth slowed down sharply, deteriorating its current account position. Loss of confidence in Thailand’s economic and financial system as well as the sustainability of the THB prompted speculators to attack the currency in 1996 and mid-1997.[/indent]
Note: THB – Thai Bhat
When hot money reverses direction as is the case of Thailand, monetary authorities are caught off-guard and left with little time to respond. As a result, the Thai Bhat lost more than half of its value by January 1998. [b]The stock market plunged by an incredible 75% in 1997 alone[/b]. The massive devaluation of the Bhat and hikes in interest rates that followed crushed the real economy as bankruptcies sky-rocketed and non-performing loans in the financial sector soared.
In summary, the Thai experience shows the extreme risk involved with investing in emerging and frontier markets. Asset prices can reach the stratosphere only to fall back to earth in no time. Investors venturing into these markets have to adjust their risk tolerance levels accordingly

[Silver_mani]

[url="http://www.andhrafriends.com/user/30251-bobbyfischer/"][img]http://www.andhrafriends.com/uploads/profile/photo-thumb-30251.jpeg?_r=1349839069[/img][/url]

[BobbyFischer]

what is hot money ?

"Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. A typical short-term investment opportunity that attracts "hot money" is the [url="http://www.investopedia.com/terms/c/certificateofdeposit.asp"]certificate of deposit[/url] (CD).

Banks usually attract "hot money" by offering relatively short-term certificates of deposit that have above-average interest rates. As soon as the institution reduces interest rates or another institution offers higher rates, investors with "hot money" withdraw their funds and move them to another institution with higher rates.

The "hot money" concept is not reserved solely for banks. Investors can move their funds to different countries to take advantage of favorable interest rates.

"Hot money" can have economic and financial repercussions on countries and banks, however. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

Read more: [url="http://www.investopedia.com/ask/answers/09/hot-money.asp#ixzz2IHd3gxJa"]http://www.investopedia.com/ask/answers/09/hot-money.asp#ixzz2IHd3gxJa[/url]

[BobbyFischer]

[b]Signs show volatile capital is coming into certain parts of Asia amid the new wave of global liquidity.[/b]
SIGNS of hot money returning to certain parts of Asia have emerged in recent months, albeit at varying degrees of frequency and pace across countries.
This comes amid the new wave of global liquidity or cash, as policymakers in developed economies such as the United States, Europe and Japan resort to implementing fresh rounds of quantitative easing (QE) measures a process that involves increasing money supply in the financial system through bond purchase to boost their weak economies.
That some of the massive cash from developed economies has already found its way into Asia, since the announcement of the QE measures about two months ago, is evident in the stock market performances and currency movements in several countries in the region.
Hong Kong, Singapore, India, Thailand, Malaysia and the Philippines, for instance, have seen their stock markets registering substantial gains, especially over the past three months, partly as a result of foreign capital inflows. Their currencies, in general, have also appreciated against the US dollar, in another indication that foreign money is flowing into their markets.