The IIF’s Salutary Cyclical Salute
Under new leadership the Institute for International Finance offered its first capital flow cut for 2013 which despite “greater cyclicality” should modestly bump last year’s almost $1.1 trillion result. A main risk is rate reversal in the industrial world upending the push as in the Fed’s sudden tightening two decades ago which presaged the Mexican crisis. Among individual contributors, FDI was distinct in a lower forecast to $515 billion, while portfolio equity will jump one-quarter to $100 billion with the $500 billion bank loan and bond category constant. Official lines will increase $20 billion to $55 billion with North Africa programs, which as in Egypt’s case so far are more frequently underwritten by other emerging economies. The latter’s GDP growth should average 5 percent which will favor share allocation also not as subject to anti-speculative controls as currency and fixed-income. Outward Chinese direct and portfolio investment doubled in 2012 to over $250 billion despite slower reserve accumulation as mainland bank foreign assets neared $500 billion. In the former, natural resources diversification is apparent with business and financial services acquisitions, while geographically Hong Kong takes half, with Latin America and Africa also popular as the pace into developing now exceeds developed regions. Emerging Asia as a destination gets 45 percent of private capital into the thirty countries followed by the publication, as India, Indonesia and Korea take share from China. However with European banks in retreat cross-border lending is 25 percent off recent annual levels. Asian reserve buildup has fallen three-quarters to under $150 billion as Indonesia’s current account joins India’s in deficit. In Europe net quarterly inflows were up 50 percent from recent trends, with Russian and Turkish borrowers particularly active. Bank repayment continued in the Czech Republic, Hungary, Poland and Romania while Ukraine lost access pending a possible fresh IMF agreement. Russian ruble debt will experience a spike with non-resident opening, while Turkey alone on the continent will have higher foreign capital demands with its chronic balance of payments gap.
Brazil, Chile and Mexico have likewise become large investment exporters as the control regime in the first has been relaxed within the context of an informal 2 real/dollar band. Peru has leaned against currency appreciation with regular intervention and stricter reserve requirements, and Uruguay imposed a holding period on high-yield notes. Mexican public debt is owned one-third abroad, while Argentina still faces capital flight from its “policy radicalization” and holdout creditor clash. Middle East transition nations have received bilateral assistance from the Gulf and South African bonds brought in a record $10 billion-plus last year following entry into standard world indices. That “technical” move will ease in the coming months as bad mining and rand direction also exact a price. Nigeria in contrast may continue to benefit from index inclusion as well as power and petroleum industry reforms. Enthusiasm will depend on eventual fiscal terms for international oil companies that could be “too onerous,” the group cautions going into heavier fog.
