The IMF’s Capital Flow Patrol Patter

Just prior to its April all-member session, the IMF’s policy and strategy arm circulated a draft design for determining the nature and sweep of acceptable capital inflow controls following a charge from the last G-20 summit where industrial and developing country representatives recognized their reality but split on their application and definition. The paper distinguishes the measures from conventional economic policy and prudential supervision elements to embrace targeted administrative, tax, or oversight action, and further notes potential permutations between residents and non-residents. It cautions that they not divert from underlying needed shifts in exchange rate level and the fiscal-monetary stance which can achieve global “rebalancing,” and that the overriding financial stability goals be clearly identified to shape a proportionate response. In an historic retrospective current emerging market portfolio investment may be at a record in terms of quarterly advances, driven by both push and pull and cyclical and structural causes. In the post-crisis timeframe local debt concentration has been particularly prominent, with the foreign share of government securities in double digits and corporate paper also getting attention. US and European mutual and pension funds have been active buyers of longer maturities, and Japanese retail players have also entered. The allocation will be “persistent and strong” into the future, with the recipient countries’ solid growth and macroeconomic management, financial system modernization, and institutional investor moves from asset class underweighting. Bond and stock prices have jumped the past year but bubbles, as calculated by traditional valuations, have not yet appeared. However credit growth may be too rapid in Brazil, Turkey and elsewhere, and in Asia especially authorities have resisted currency appreciation and interest rate “normalization” in light of money and commodity-influenced inflation creep. The budget position has likewise stayed expansionary, and the use of short-term inward capital curbs has been to “mixed effect,” with still attractive returns confining the limits to “marginal” consideration.

However uncertainty has spiked around the potential intensification and reclassification of existing regimes and “abrupt announcements” which have angered and surprised participants accustomed to relatively open and smooth official communication. The practice guide suggests that price-based approaches are more transparent than procedural ones, and that costs in terms of compliance and enforcement could hurt securities market building. A 40-country exercise found that only one-quarter met the mooted requirements for justifying control measures. Brazil’s representative at the Fund immediately blasted the norms as undue interference as the central bank exercised its prerogative to extend the 6 percent inflow levy for up to 2-year company loans.