The World Bank said in its latest global economic report that GDP growth in East Asia and the Pacific is likely to moderate slightly to eight per cent this year from an estimated 9.3 per cent last year.

However, the bank warned that strong capital inflows may pose risks to growth in the region, especially if asset bubbles emerge.

Net international equity flows to developing countries rose 42 per cent in 2010.

Economists, though, are confident Asian nations will be able to tackle capital inflows and prevent overheating.

Estimates say capital inflows into emerging markets grew to US$825 billion last year, compared with US$581 billion in 2009.

This has raised concerns as more foreign capital chases assets such as stocks and property, governments in Asia may have to take further measures to fend off the hot money and prevent a boom and bust.

Already, countries like Indonesia have taken steps to exercise mild control over speculative inflows.

Experts believe these measures will remain in place.

Bank of America Merrill Lynch economist, Global Research, Chua Hak Bin said: "The Indonesian controls in June were basically a one-month minimum holding period for central bank certificates, where the inflows paused for one month and subsequently continued resuming after that.

"So there could be some, but I think it will still be a very cautious introduction of controls and small taxes and so on.

"They've also raised the reserve requirements for US dollar deposits in Indonesia, for example, to reduce the risk of what we saw in the Asian Financial Crisis of banks borrowing in foreign currencies, being very cheap.

"So there will be some (and) there will be hiccups in the markets but we don't expect it to be draconian".

As central banks in Asia tighten interest rates, overseas investors looking for higher yields may be encouraged to pump more money into the region.

Bank of America-Merrill Lynch said Indonesia is likely to raise rates by 100 basis points this year, after keeping its policy rate on hold at 6.5 per cent throughout 2010.

But high inflation in the region will act as a deterrent to foreign inflows.

"Inflation will solve part of the problem because as inflation rises the fear is that even the current yields being paid is not high enough and so investors will probably be a bit more lukewarm putting fresh positions in the assets," Mr Chua said.

"The stock market in Indonesia went up 90 per cent two years ago, another 50 per cent. So part of it will be corrected by the fact that its already been a hot market."

Bank of America Merrill Lynch also expects Thailand to raise interest rates by 75 basis points and Malaysia to increase rates by half a percentage point this year.

channelnewsasia.com