On May 18th the Asian Development Bank (ADB) released its annual Asian Capital Markets Monitor report, which investigates the performance and outlooks for the equity, bond and currency markets in emerging economies. According to the report, several factors have cumulatively increased the risk of Asian economies facing sudden high levels of investment capitals, leading potential destabilization of currency and financial markets.

Amidst worries of a continued national debt crisis in Greece and the Euro-zone, international investors have been paying greater attention to Asian economies. The interest has been further increased by the area’s swift and secure return to a positive economic condition after the international economic crisis. The ADB claims that the increased capital inflows could trigger significant upwards pressure in national currency, leading to volatility in valuation and the financial markets. Additionally, national inflation, which among emerging Asian economies is widely considered to be manageable, could be caused to increase. Cumulatively, sudden burst in overseas investment capital might lead to limitations in short and mid-term growth potential for emerging Asian economies.

The ADB recommends that Governments of vulnerable economies take action now to ensure that appropriate national policies are ready for potential investment inflows. Suggested policy considerations consisted of sound macro-economic management, flexible foreign exchange regimes, increased resilience of national financial systems, along with temporary and targeted capital controls. The suggestion of capital controls is especially aimed at nations which expect capital inflows to be transitory with significant destabilizing effects on exchange rates, and with uncertain national macro-economic policies.

Under the ADB’s classification, the emerging Asian economies consist of the People’s Republic of China, Hong Kong, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taipei, Thailand and Vietnam.

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The Government of Vietnam recently released Circular 64, a new piece of legislation taking effect on June 7th and altering the tax treatment of the interest earned on bonds and CD held by overseas investors. Under the new regulations, interest earned will be subject to a 10 percent level of taxation. The new rate of interest will be calculated and paid after the sale or transfer of the bond. Previously, the tax liability was calculated as 0.1 percent of the cumulative total of interest earned and the instrument’s face value.

According to Do Thu Ha, a tax partner of KPMG Vietnam, the new changes were instated because of the ambiguity of previous legislation. Despite the added taxation certainty provided to foreign investors, finance industry experts have spoken out against the changes. Hoang Gia Hiep, deputy general director of Vinashin Finance Company, has decried the legislation as a “shock for the local bond market”. He explained that the finance industry has held large scale petitioning to the Government to take action and lure foreign indirect investment capital back into Vietnam, and the the current changes are counter-productive. Tom McClelland, Tax Partner at Deloitte Vietnam, also objected to the new tax rate, saying that the withholding rate on interest should be completely eliminated or at least thoroughly reduced, for the nation to draw the much needed capital required for economic growth. He added that funding costs are a major aspect of any infrastructure project, and the elimination of withholding rates on interest could be a great influence in whether projects are carried out or receive foreign investment.

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On April 26th the IMF published a previously unreleased transcript of a speech given by Naoyuki Shinohara, Deputy Managing Director of the IMF, at the 14th ASEAN Finance Ministers’ Meeting, held on April 8th 2010 in Nha Trang, Vietnam. The speech focused on the key economic challenges the IMF perceives as facing ASEAN member nations. According to the Deputy Managing Director, to see strong economic growth, ASEAN members must overcome the fragile external economic environment, the potential for surges of inward capital flows, and the need to expand private domestic demand over the medium term.

Naoyuki Shinohara said that Asian nations are showing greater levels of economic recovery and fiscal stability, when compared to advanced economies. Cumulatively, the ASEAN members are projected to increase economic output by 5.5 percent over the 2010 year. Despite the positive outlook, ASEAN economies are highly reliant on external economic factors. The IMF does not expect credit conditions across the US and the Euro-Zone to normalize until 2011, and the Deputy Managing Director warned that ASEAN members need to balance this factor into the timing of their 2009 stimulus package withdrawal policies. He advised that policymakers should consider taking precautions to allow for agility in any present decisions, to cope with unforeseen economic shifts.

According to Naoyuki Shinohara, ASEAN economies face the unique challenge of possible spikes in foreign capital inflows. As the international economy recovers, it is conceivable that ASEAN nations will see higher than expected investment. In preparation for such eventualities, policymakers have been advised to tighten fiscal regulations, allow for greater flexibility in exchange rate in decision making, create macro- and micro-level policies to handle the spikes, and begin accumulating fiscal reserve to use as a safe-guard.

A warning was given to ASEAN Governments that pre-crisis fiscal policies favoring expansion of exports over the growth of local private consumer demand need to be addressed. The Director gave broad directives for ASEAN economies to instate reforms to improve private investment, raise productivity in services, and improve the overall private sector consumer demand.

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Several anti-smoking organizations across the world have released new reports claiming that a fresh round of tax increases needs to be seen on tobacco products, and Government officials across New Zealand, several US states, Vietnam and the UK are looking set to oblige. Although, the governments and anti-smoking groups are fighting for differing causes, with Governments citing budgetary shortfalls and the need for increased revenues as the reason for tax rises.

The Kansas Senate Taxation committee announced on March 10th that it had heard arguments in favor of increasing tobacco taxation by an equivalent of USD 0.55 per pack of cigarettes, and will vote on the proposal by March 19th. The increased measure would bring the state’s taxation levels in line with the US national average of USD1.34 per pack. Supporters of the increase claim that it would raise an extra USD69 million annually. On March 11th the US Senate passed the Prevent All Cigarette Trafficking Act (PACT), which bans the remote sale of tobacco products. The act aims to clamp down on tobacco-tax evasion by reducing mis-documentation or non-reporting of tobacco sales. Scott Ramminger, spokesperson for the Coalition to Stop Contraband Tobacco, has hailed the vote as “…a huge victory for American taxpayers, American small business owners and America’s youth.” On the same day, Gary Herbert, Governor of Utah, announced that he will not veto a bill which would see an USD 1 increase per pack of cigarettes, despite his campaign promise of no tax increases.

In New Zealand, Tariana Turia, co-leader of the Maori Party and Associate Health Minister of New Zealand, revealed on March 12th that she intends to request the New Zealand Members of Parliament to approve a series of tax increases, which will see the price of a packet of cigarettes rise by 20 percent for the next five years. While she has indicated that her ultimate goal is to see the outright ban of cigarettes sales, the newest proposal is aimed at making smoking cost-prohibitive among national youths.

In the UK, the anti-smoking charity Action on Smoking and Health (ASH) has sent a proposal to the Government to increase tobacco taxes by an extra 5 percent. The group claims that their suggestion would see 190 000 UK citizens stop smoking, and an approximated £20 million saved in the health-sector.

Similarly, in Vietnam the national representative of the World Health Organization has recommended a 20 percent increase in tobacco taxes, which would raise an estimated VND1.9 trillion (US$101.7 million) per annum. It is also expected that the action would see a 300 000 person decrease in smoking.

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