Capital Surfers’ Trillion Dollar Wave
The IIF, in its January summary of private capital flows to thirty emerging economies, reported that they jumped 50 percent to just over $900 billion last year and will surpass $950 billion in 2011 on the way to reaching the trillion dollar mark again subsequently. All regions benefited with China’s number at an historic high of $225 billion, and portfolio as opposed to direct investment at $200 billion was unusually strong, while bank lending at over $150 billion was in contrast to 2009’s net outflow. The group predicts medium-term momentum in these segments will flag with the proliferation of inward control and policy tightening measures as annual GDP growth above 6 percent and low industrial world interest rates remain supportive. It suggests that a stricter fiscal stance and currency appreciation could forestall a potential boom-bust cycle, and cites the “downside risk” of sudden G-3 monetary shifts. Consumer and asset inflation is another worry with spare output capacity and food and fuel price rises with supply constraints, and developing country authorities have often been slow to remove anti-crisis stimulus. The aggregate current account surplus in the universe tracked was up a further $370 billion in 2010, and the “secular trend” is for lower public debt and structural improvements. Emerging equities’ weight in the benchmark MSCI global portfolio has tripled the past five years to just under 15 percent, but is still only half the host economies’ world GDP contribution. Despite recent control moves in Asia and Latin America including taxes, holding periods, and prudential requirements that may be absorbed by fund managers, they erode a longstanding reputation for openness and serve a “limited role” in adjustment toward permanently greater inflows which may be eventually subject to common G-20 regulatory norms.
Asia will continue to dominate with 40 percent of the private capital total and $500 billion annual increases in foreign exchange reserves that continue to be recycled by central banks as net outflows toward dollar and euro-denominated government paper and other instruments. India is an exception with its current account deficit, and the offsetting buildup of external corporate borrowing may be excessive as a resumed privatization push hopes to lure FDI. Europe outside Poland, Russia and Turkey is still a soft spot and fiscal positions there too are sensitive as Romania and Ukraine continue to rely on official finance. In Latin America, Brazil has resorted to regular interventions and controls to stem real appreciation that is likely a long-term trend while companies have accounted for roughly half the region’s $60 billion international bond issuance. In MENA the spillover from political upheaval and economic stagnation in Tunisia and Egypt could blight interest, while in Africa South African GDP growth at 3 percent is only half commodity-exporting neighbors as the budget picture also worsens to stem otherwise cresting capital tides.
