Global Capital Flows’ Forever Fluctuations
With policy-makers again slamming “hot money” developing market outflows in a possible replay of multi-asset class crisis, the IMF published a paper asserting that capital movements for all economies have been “fickle” over the past three decades. The “roller coaster” has been similar both in gross and net terms since 1980, although the latter have been more stable for advanced countries with emerging market outward investment only accelerating recently by historic comparison. The analysis applies statistical regressions to find standard deviations and persistence in a common range, with EM volatility falling incrementally. FDI is steadier than portfolio allocation, but debt and equity and bank lending directions overlap. Risk aversion and interest rate measures show that volume rises in easy monetary conditions equal to 2 percent of GDP for that group. As domestic residents diversify abroad two-way fluctuations may diminish as a “natural hedge” as traditionally greater foreign funding fades, according to the research. For almost half the 145 countries tracked quarterly data are available and isolate private from official versions. Including the second type would be misleading since that source in Greece compensated for the sharp commercial collapse as its sovereign crash began. Gross developing market flows quintupled over the period to 12 percent of GDP prior to 2008, and bank credit led the swings since although even FDI has reversed. The monograph points out that the figure has dropped in the past five years partially due to the large financial institution share. Pro-cyclicality has been mild with increases associated with higher economic growth and accommodative monetary policy but stress as reflected in sentiment indicators and benchmark instrument spreads can negate the pattern. Risk shifts correlate most closely to bank involvement and co-movement holds as well for industrial country destinations. The examination stops short of classifying institutional versus retail participation, with separate EPFR numbers underscoring triple the fight out of bond funds for individuals as a proportion of original commitments this year. Both local and hard-currency debt has been shed for months with equity barely positive selected weeks.
Stock markets despite average single-digit price-earnings ratios have however lagged in the performance sweepstakes, amid predictions that the sovereign EMBI and corporate CEMBI may end just flat for the year. At mid-August Asian exchanges amplified the previous BRIC swoon as India was in the crossfire for that cohort. As the new central bank chief was poised to press dusty reform recommendations, the rupee descended past 65 to the dollar as capital outflow controls were imposed and big family conglomerates scrambled to handle external borrowing exposures. Indonesia’s shared current account deficit predicament heading into the election cycle drew investor ire, as state pension funds were ordered to buy shares. Former favorites the Philippines and Thailand were shunned as officials denounced “herd” exodus. Bangkok reported a recession for the last quarter, and the Manila bourse was closed for days from typhoon damage accompanying fund manager wreckage.
