Capital Flow Management’s View Vagaries
The IMF published an updated paper on issues and trends informing its “institutional view” on capital controls since 2012, a period of greater openness and volatility addressed mainly with macro-economic and prudential policies as opposed to strict movement limits. The G-20 and OECD continue to debate revised frameworks and multilateral consistency as direct and portfolio flows recover while still lagging pre-crisis levels, particularly on bank loans and derivative transactions. In recent quarters they have swung several points as fraction of GDP often due to global shifts such as during the 2013 Federal Reserve “taper tantrum.” Both push and pull factors contribute and domestic emerging market risks increasingly focus on both corporate and sovereign balance sheet weakness. Funding costs dropped this year aided by better current account performance, but the reduction may not last, according to the analysis. Two dozen countries such as Brazil, India, Russia, South Africa and Turkey resorted chiefly to fiscal and monetary responses, including currency depreciation intervention, to handle reversals. China and Peru loosened policy while imposing outflow curbs, while broader emergency restrictions applied in Cyprus, Iceland, Greece and Ukraine to prevent bank deposit flight and exchange rate collapse in the context of Fund adjustment programs. They typically followed previous recommendations as to scope and timing with unwinding linked to general financial sector stabilization, but also added costs in terms of administrative burden, risk premium, and market distortion. In the latest 2013-16 timeframe economies like Colombia and Thailand relied on macroeconomic tools almost entirely to counter surges as a wider range of countries adapted bank rules on loan-to-value and debt-to-income ratios as well as capital and liquidity standards. Frontier market experience in Africa and elsewhere has been different as they only began accessing global bond markets in recent years and exchange rate changes have been slower. Ghana and Nigeria introduced controls both in law and practice that were subsequently relaxed, although the latter remains suspended from JP Morgan’s local debt index for lack of access. The paper acknowledges that easy advanced economy monetary policy magnified direction but argues that improved regulation across-the-board on Basel III norms, insurance, accounting and derivatives mitigated pressure.
China will continue the capital account liberalization pattern according to its next 5-year Plan, as neighbors like Korea also relax repatriation conditions. Sequencing reflects the Fund’s preference to begin with direct investment and delay short-term portfolio opening until last. Beijing in 2015 started to tighten outflow flexibility, first with suspension of the Qualified Domestic Institutional Investor scheme, but it insists such moves are temporary and the yuan’s inclusion in the SDR basket should reinforce freer securities participation. The OECD is now reviewing its 25-year old Capital Movement code with attention to macro-prudential treatment, and the proposed Trans-Pacific Partnership, although scrapped with US failure to ratify, nonetheless detailed disruptive flow provisions. In Europe the Vienna Initiative and new Single Supervisor have developed formal and informal regimes for cross-border bank credit, and cross-regional bodies have collaborated on joint supervision. The Fund has strengthened technical assistance on the issue on missions to poorer members like Bangladesh and Myanmar, but global data gaps persist despite improvement in the Coordinated Portfolio Investment Survey. As the IIF tracks for a half dozen developing economies, a questionnaire completed by 40 members recommended more frequent even daily numbers for a worldwide cross-section matching information flow.
