International Monetary Fund
World World
Economic Economic
OutlookOutlook
Spring 2011Spring 2011
Bangko Sentral ng PilipinasMay 6, 2011
Chapter 4. International Capital Flows:
Reliable or Fickle?
Chapter 4. International Capital Flows:
Reliable or Fickle?
John Bluedorn, Rupa Duttagupta, Jaime Guajardo, and Petia Topalova
With support fromAngela Espiritu, Murad Omoev, Andy Salazar
and Jessie Yang
Sharp recovery in capital flows…
3
Foreign direct investment Portfolio equity Portfolio debt
Other bank and private Other government Derivatives
Total
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
1980 1984 1988 1992 1996 2000 2004 2008H1 2010H1
Total Net Inflows to Advanced Economies
(percent of aggregate GDP)
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
1980 1984 1988 1992 1996 2000 2004 2008H1 2010H1
Total Net Inflows to Emerging Markets
(percent of aggregate GDP)
How does the post-crisis recovery in flows look like?
Looking at history, how stable and persistent are flows?
How have net flows to EMEs behaved under easy global financing
conditions?
Does a country’s direct U.S. financial exposure affect the sensitivity of
its net flows to U.S. interest rate hikes?
Capital flows are fickle
Volatility has increased slightly over time; show low
persistence
Debt-creating flows more fickle than others
Greater direct U.S. financial exposure ⇒⇒⇒⇒ negative
additional effect on net flows from U.S. interest
rate hikes
Capital flows to EMEs rise and fall with easy global
financing conditions
4
Summary results
-4
-3
-2
-1
0
1
2
3
4
5
2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
-4
-3
-2
-1
0
1
2
3
4
5
2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
Advanced Economies Emerging Market Economies
The recovery of capital flows to EMs—
extraordinary in pace, but not in levels reached
5
FDI
Portfolio debt
Portfolio equity
Bank and other
private
TotalNet Private Flows(Percent of GDP, 4Q moving avg.)
6
Current flows to EMEs are typically below historical surges. Recent episode led by portfolio debt, followed by
bank & other private flows
1991–97 2004–07 2010:Q1-Q3
-2
-1
0
1
2
3
4
5Emerging Latin America
1991–97 2004–07 2010:Q1-Q3
-2
0
2
4
6
8
10 Emerging Europe
1991–97 2004–07 2010:Q1-Q3
-2
-1
0
1
2
3
4
5Emerging Asia
1991–97 2004–07 2010:Q1-Q3
-2
-1
0
1
2
3
4
5Other Emerging Economies
Net Private Flows(Percent of GDP)
FDI
Portfolio debt
Portfolio equity
Bank and other
private
Total
The recent episode (so far) contrasts with the historical trend of a falling share of debt-creating flows
7
0%
20%
40%
60%
80%
100%
1980s 1990s 2000s 1980s 1990s 2000s 1980s 1990s 2000s
Advanced economies Emerging economies Other developing
economies
Foreign direct investment Portfolio equity
Portfolio debt Other bank and private
The Relative Importance of Various Types of Flows
(Percent of total)
Volatility of flows has increased slightly over time. Bank & other private flows usually most volatile
8
0
1
2
3
4
5
6
1990 1995 2000 2005
Advanced Economies: Total Net Private Flows
(median)
2009
0
1
2
3
4
5
6
7
1990 1995 2000 2005
Emerging Market Economies: Total Net Private
Flows
(median)
2009
0
1
2
3
4
5
6
1990 1995 2000 2005
Advanced Economies: By Type
(median)
2009
0
1
2
3
4
5
6
7
1990 1995 2000 2005
Emerging Market Economies: By Type
(median)
2009
Interquartile range of total net
private capital flows
Total net private capital flows Foreign direct investment
Portfolio equity
Portfolio debt
Bank and other private
Standard deviation of net capital flows
(10-year rolling window)
Persistence of net flows is low. Portfolio debt flows are usually least persistent.
9
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1990 1995 2000 2005
Advanced Economies: Total Net Private Flows
(median)
2009
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1990 1995 2000 2005
Advanced Economies: By Type
(median)
2009
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1990 1995 2000 2005
Emerging Market Economies: Total Net Private
Flows (median)
2009
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1990 1995 2000 2005
Emerging Market Economies: By Type
(median)
2009
Persistence (AR1 coefficients) of net capital
flows (10-year rolling window)
Interquartile range of total net
private capital flows
Total net private capital flows Foreign direct investment
Portfolio equity
Portfolio debt
Bank and other private
Low Global Interest Rates
1987, 1991-94, 1999, 2001-
10:Q3
10
Capital flows to EMEs ↑↑↑↑ when (1) easy external financing conditions, and (2) EMEs had strong growth performance
Before During After Before During After
-1
0
1
2
3
4
-1
0
1
2
3
4
Before During After
Foreign direct
investment
Portfolio debt
flows
Portfolio equity
flows
Bank and other
private flows
Total
Low Global Risk Aversion
(VIX) 1989, 1991-
96, 1999, 2004-07
Low Interest Rate, Low VIX
and High Growth Differential
1991-93, 1996, 2004-07
Net Private Flows(Percent of GDP)
11
Net flows strongest when global interest rate and risk aversion both low
-1
0
1
2
3
4
3.2
1.2
1.6
1.0
Low global interest
rates and low risk
aversion 1991-
94, 1996, 2004-07
Low global interest
rates and high risk
aversion
1987, 1999, 2001-03,
2008-10:Q3
High global interest
rates and low risk
aversion 1989, 1995
High global interest rates
and high risk aversion
1986, 1997-98, 2000
Net Private Flows(Percent of GDP)
Foreign direct
investment
Portfolio debt
flows
Portfolio equity
flows
Bank and other
private flows
Total
Regression analysis—two innovations
Use economies’ direct financial exposure to the United
States to identify difference in effect of U.S. rate hikes on net
flows to financially exposed versus unexposed economies.
• Regression also controls for all possible global factors that affect net flows to all
economies in the same way
Distinguishes difference in effects of unanticipated versus
actual U.S. interest rate changes.
U.S
. Dire
ct F
inan
cia
l Exp
osu
re W
eig
ht
(Proportion of total external assets and liabilities
that are U.S. assets and/or liabilities)
13
0.0
0
0.0
5
0.1
0
0.1
5
0.2
0
0.2
5
0.3
0
0.3
5
0.4
0
0.4
5
0.5
0
CanadaMexico
UruguayChinaKoreaIsraelBrazil
GuatemalaJapan
ColombiaChile
United KingdomAustralia
PhilippinesEl Salvador
PeruThailand
NetherlandsIndia
NorwayEgypt
MalaysiaArgentina
EcuadorNew Zealand
SwedenIndonesia
BelgiumSouth Africa
RussiaHungary
IrelandPolandFinlandTurkey
GermanyFrance
DenmarkIceland
Czech RepublicSpain
ItalyAustria
RomaniaJordan
UkraineGreece
BulgariaMoroccoPortugal
Unanticipated only small part of realized rate changes. (Percentage points)
14
-0.5
-0.3
-0.1
0.1
0.3
0.5
-2
-1
0
1
2
1989q1 1992q1 1995q1 1998q1 2001q1 2004q1 2007q1 2010q1
Unanticipated rate change
(left scale)
Realized rate change
(right scale)
0.0
-3
-2
-1
0
1
-1 0 1 2 3 4 5 6 7 8
-3
-2
-1
0
1
-1 0 1 2 3 4 5 6 7 8 15
Greater direct U.S. financial exposure ⇒⇒⇒⇒ negative additional effect on net flows from U.S. interest rate hikes. Impact of realized rate change is much smaller.
Emerging Market Economies Advanced Economies
Equivalent realized rise in U.S. monetary policy rate (12 bp)
Unanticipated rise in U.S. monetary policy rate (5 bp)
Change in net flows(Percent of GDP)
Quarters after impact Quarters after impact
Negative additional effect sharper under easy global financing conditions
16
-4
-3
-2
-1
0
-1 0 1 2 3 4 5 6 7 8
Baseline
Low global risk aversion
Low global interest rates
Low global interest rates and risk aversion
Quarters after impact
Change in net flows(Percent of GDP)
For financially exposed EMEs, negative additional sensitivity to U.S. rate hike positively correlated with:
17
Greater integration with global financial markets
Low domestic financial depth
Flexible exchange rate regimes
Weak growth performance
Conclusion ⇒⇒⇒⇒ variable capital flows are a fact of life
Net flows exhibit low persistence and volatility has increased
over time. Debt-creating flows more fickle.
Net flows to EMEs rise and fall with easy global financing
conditions.
Greater direct financial exposures to the United States ⇒negative additional effect on net flows in response to U.S.
monetary tightening.
These additional effects stronger when U.S. rate hike
unanticipated and occurs under easy global financing
conditions.