Capital Flows’ Capped Wellspring Whirl
The IIF’s September Capital Flows survey kept the 2011 total for 30 emerging markets roughly constant at $1.05 trillion while reshuffling the portfolio debt-equity mix in favor of the former, given the push from interest rates on industrial country instruments “cut to the bone.” The 2012 prediction is for the same amount, although with another year of 6 percent-range economic growth the portion will decline relative to GDP to 4 percent. FDI will be almost half the sum at $450 billion, overwhelmingly going to China, whose direct investment outflows at $100 billion also reflect the net creditor status of a large swathe of the tracked universe. In contrast, the MENA and Europe regions have been further downgraded, with the latter hit in particular by stock and bond sputtering in Turkey over its record current account deficit and credit expansion. A secular trend toward greater exposure should not be halted by recent selloffs as sovereign re-ratings will continue to elevate developing relative to developed credits, according to the report. In addition to traditional risk metrics, the emerging world no longer seems as historically prone to crises, while the institutional quality in advanced counterparts cannot be automatically presumed as evidenced by the Eurozone rescue and US budget ceiling debates.
In Asia share allocation will slip from 2010’s $120 billion to $70 billion, but private debt components, equally bank and non-bank, will come to $250 billion. India is alone in running a current account deficit while Indonesia’s FDI has quadrupled since 2009. In Europe Swiss-franc borrowing vulnerability is an obstacle in Hungary, Poland and Romania, and Ukraine remains out of compliance with its IMF program and Russia’s election calendar injects unease even with Putin’s intention to reclaim the presidency. Latin America’s overall “resilience” with net private inflows over $250 billion will be tested by Brazil’s continued capital control use, Mexico’s trade and remittance ties to the US and Argentina’s likely extension of the state intervention model into a second President Fernandez term with worsening external accounts and capital flight already features. Monetary policy in the region could switch toward cuts particularly if commodity prices weaken, which is also a danger for Persian Gulf destinations and South Africa. High oil and metals revenue are needed to sustain infrastructure and social spending, and nonresident bond purchases of $4 billion through the first half serve to offset the perennial balance of payments gap despite their consequences for rand volatility.
In a companion annual update on its stable capital flow and debt negotiation principles the group hails the top information dissemination and investor relations scores of Latin American and other issuers and examines restructuring cases in Greece, Dubai, Iceland and Cote d’Ivoire. In Greece the assessment may be complicated by its own role in offering a reduction menu to European authorities to meet desired private sector involvement. The package calculates the principal and interest haircut at 21 percent in a deeper concession than original French and German bank-backed proposals, and while self-congratulations are in order for following the “good faith” guidelines the episode may be far more involved in terms of potential conflict and Eurozone repercussions.
