The IIF’s Broken Globalization Records
The Institute for International Finance issued a post-crisis retrospective on the “broken” globalization trend in mature and emerging financial markets since the 2007 apex and warned of an indefinite “hiatus” under new banking and securities regulation stifling cross-border flows now averaging $1 trillion annually. It argues that the process should strengthen after deleveraging from the previous decade-long credit boom with developing economies in particular a “powerful engine” despite closed capital accounts in giants China and India. That future is however diluted by uncertain prospects for trade and infrastructure finance and bond and stock market-making, as backlash from national supervisors promotes “balkanization.” The G-20 and Financial Stability Board have been the focus for harmonizing exchange rate and monetary policies and prudential norms, but the balance between benefits and risks has often strained business models and may inject greater volatility, according to the group. Emerging markets should avoid short-term capital inflow restrictions and focus instead on local activity and institutional development. The IMF may be called in as a backstop and governance tweaks contained in pending US legislation are needed for continued legitimacy. The network of central bank swap lines could be extended as an additional safety net beyond existing mainly G-4 and regional arrangements. Since 2008 better Asia and Latin America flows have compensated for Eastern Europe’s “bust,” but by segment syndicated and project lending “reversed” while portfolio investment has been uneven. As Euro Area banks have retrenched with EM borrowers, US, UK and Japanese competitors entered, and Chinese and Gulf units have become active worldwide. Non-resident equity is closer than fixed-income allocation to the mid-2000s peak, but foreign ownership of government bonds has skyrocketed and prompted notable selloffs as in the 2013 Fed taper episode. FDI in contrast has been stable at an average $1.5 trillion from 2010-13 increasingly in South-South direction. Financial deepening as measured by the range of assets/GDP at 200 percent is half the mature market level, but the pace slackened prior to the economic slowdown and investor liquidity and protection must become priorities as new technologies expand the product range, the IIF urges.
Capital flows/GDP at 4 percent are half the 2007 proportion and the disparity in equity market size is particularly pronounced at only 12 percent the total versus the almost one-third share of global output. Emerging market derivatives turnover has reached $1 trillion with the majority conducted over the counter, which will be subject to tighter global clearing and reporting guidelines that could delay progress. Ten case studies at the end point to good and lagging practice with Chile and South Africa praised as sophisticated middle-income destinations. China, India and Indonesia are bank-dominated with limited international participation while Russia and Turkey’s capital markets are also “shallow.” Poland and the UAE have embraced open capital accounts and Brazil has followed an intermediate strategy, and almost all the countries despite mixed integration were “unscathed” by the post-2008 crisis in another historic break.
