Capital Flows’ Blocked Blandishments
The IIF, while leading private Greek debt restructuring negotiations at an impasse over coupon rates and official creditor burden-sharing, slashed its 2011 and 2012 cross-border capital flow tallies to reflect lingering Eurozone and global throttles. The original $1 trillion expectation last year will come in 10 percent less, and this year’s total will slide another 15 percent to $750 billion for the 30 countries monitored. The “sharp drop-off” began in Q3 and is likely to extend through the first half, with the cumulative revision coming to almost $350 billion, hitting bank lending most by segment and Asia by region. The precipitous fall reflects the pro-cyclical experience of the 2008-09 post-Lehman shock, and the report points out that China slowdown concerns have combined with the euro crisis in recent months. FDI has held up in all geographies over the period, and bond and equity allocation may not suffer as much with the upgrade tendency in emerging market credit ratings. In 2013 flows could recover to $925 billion, still below the 2007 peak both in comparative sums and fractions of GDP. Almost half this amount will be in direct investment form and will increasingly concentrate between developing economies as previous inward and outward capital controls are relaxed. Already Chinese banks may be stepping in as European counterparts retrench in Asia, according to the survey. With the latter’s $5 trillion in claims on all emerging economies, currency zone breakup and other worst-case scenarios would entail “massive implications.” The December loan conditions reading showed clear deterioration with the index below 50 as supply and standards tightened, although trade finance is still available. The GDP growth forecast for the universe was shaved to 5.5 percent, although lower inflation at 5 percent allowing rate easing should keep real yields appealing versus the industrial world. Incremental progress in current account “rebalancing” has been seen with the unwavering appreciation of the Chinese yuan against the dollar, but Gulf oil exporters have been an exception as their joint surplus doubled to $300 billion last year.
Asian stock market inflows were only one-sixth of 2010’s $120 billion, and will only “gradually revive” in the near term. In Europe bond participation will fall one-third, with Hungary, Turkey and Ukraine most at risk with their balance of payments and external funding positions. In Russia annual capital flight after December’s disputed legislative elections may be close to $150 billion, in contrast to Latin America, outside Argentina and Venezuela, which is “holding the fort.” However in the Middle East only official flows will jump noticeably as private investors in Egypt and elsewhere continue to observe the Arab Spring barricades.
