Transcript Trends in Capital Flows

International capital market flows
continued to retreat in 1999
percent
Basis points
Capital Market
Flows/GDP
EMBI
1400
1200
5
4
1000
800
3
600
2
400
1
200
Source: Euromoney, IMF, DECPG staff estimates
20
00
20
01
99
98
97
96
95
94
93
92
91
0
90
0
FDI flows now the largest source of
development finance
Regions
Total
Billions of US$
Billions of US$
90
250
Latin America and
the Caribbean
80
200
70
60
50
40
150
East Asia and the
Pacific
100
30
Europe and
Central Asia
20
50
10
Others
0
1992
1993
1994
1995
Source: World Bank Debt Reporting System
0
1996
1997
1998
1999*
* Preliminary
Private capital flows are expected to recover
gradually
% of GDP
5
Forecast
4
3
2
1
0
1991 1992 1993 1994 1995
FDI flows
Source: DECPG, March forecast.
1996 1997 1998 1999 2000 2001
Non-FDI flows
Most Developing Countries Are Deemed
Marginally Creditworthy
Credit Rating (1Best to 25 Worst)
25
20
Pakistan
15
10
Chile
Argentina
Bahrain
Korea
Qatar
Greece
Below
Investment
Grade
Kuwait
IsraelUARHong Kong(China)
Taiwan(China)
Triple
AAA
5
Denmark
0
0
10000
20000
Per Capita Incom es (US$1995)
30000
40000
Aid flows rose in 1998:
End of donor fatigue?
Billions of U.S. dollars
70
U.S.
U.K.
Japan
Germany
France
Others
Percent
Percentage of GNP
of DAC countries
0.4
60
0.3
50
0.3
40
0.2
30
0.2
20
0.1
10
0.1
0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998
Few countries reached the aid target
1.1
1
0.99
0.91
0.9
0.8
UN Target 0.7
0.71
0.7
0.61
0.6
0.5
0.41
0.4
Average country effort
0.35 0.33
0.32 0.31
0.29 0.28 0.28 0.27 0.27
0.26 0.25 0.24
0.3
0.2
0.2
0.1
United States
Italy
Austria
Spain
Germany
New Zealand
Japan
Australia
Canada
Ireland
Finland
Switzerland
Belgium
France
Luxembourg
Sweden
Netherlands
Norway
0
United Kingdom
0.1
Denmark
% of GNP
0.8
Reduced aid flows but more efficient
allocation
70%
64%
60%
50%
40%
30%
20%
10%
9%
0%
1990
1997-98
The Enhanced HIPC Framework
NPV Debt to
export ratio
35
US$ billion
350
300
30
250
25
200
20
150
15
100
10
50
5
0
0
1996
1998
NPV Debt
NPV/Exports
2000
Official non-concessional
flows declined in 1999


Official non-concessional flows, including
those from the IMF, fell to negative levels in
1999 from unusually high levels in 1998
related to rescue packages for crisis countries.
The role of such financing is changing in
response to concerns about moral hazard and
the need to bail-in the private sector.
0.60
0.56
0.52
0.48
0.44
DEVELOPED COUNTRIES
Jun-98
Jun-97
Jun-96
Jun-95
Jun-94
Jun-93
Jun-92
Jun-91
Jun-90
Jun-89
Jun-88
Jun-87
0.40
Jun-86
Short-term/Total claims (ratio)
Short-term lending to developing countries
rose rapidly in the 1990s
DEVELOPING COUNTRIES
Short-term debt is pro-cyclical to
economic growth
15
60
South-Korea
40
10
20
5
0
-10
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-5
1986
0
-20
-40
GDP Growth (l.h.s.)
Growth of short-term debt (r.h.s.) -60
Elasticity with respect to GDP
The pro-cyclical response is worse during
adverse shocks
1.5
1
Positive shock
0.9
0.5
0
-0.5
-1
-1.5
-2
-1.8
Negative shock
Excessive short-term borrowing (relative to
reserves) has a strong association with crises
Thailand
7
6
5
1.6
4
3
2
1.4
1.5
1.3
1
1.2
0
-1 95Q1
-2
95Q3
96Q1
96Q3
97Q1
97Q3
1.1
1
crisis index
ST Debt / Reserves
Mexico
3
5
2
4
1
3
0
2
93Q1
93Q3
94Q1
94Q3
-1
-2
95Q1
95Q3
1
crisis index
ST Debt / Reserves
0
Safeguarding against crisis:
the near-term agenda


Safeguard measures are needed in the near-term,
alongside longer-term measures, to reduce the risks
of crisis
An analysis of recent proposals suggest three main
conclusions:



First, all such measures impose costs, but these costs
are likely to be less than those of a full-fledged financial
crisis, and especially for the poor.
Second, none of these measures can substitute for the
need for better macroeconomic fundamentals.
Third, all such measures have their limitations and may
need to be combined and adapted to each country’s
circumstances
Safeguards come with costs





“Chilean-style” taxes on short-term borrowing require
comprehensive coverage of all short-term inflows
Prudential capital controls on the banking sector’s
international exposure raise costs for borrowers and
may be difficult to implement
Restrictions on capital outflows are even more
difficult to implement
Increasing the amount of international reserves
imposes significant fiscal costs
Privately contracted contingent credit lines require
expensive collateral, may be offset by reduced
lending, and are likely to be available only to the
relatively creditworthy
One hundred (and thirty) years of
capital flows

The past 130 years have seen at least four
surges in private capital flows to emerging
markets:
 1870
to WW-I
 Post-WW-I recovery to the Great Depression
 1973-1982
 the 1990s
Capital flows and crises were linked even
before the gold standard era
40
35
30
25
20
15
10
5
%Default
%Restructuring
1998
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
1870
1860
1850
1840
1830
1820
0
Four messages from history

Capital surges to emerging markets occur when
communication is improving, growth and world trade is
expanding, financial innovation is rapid, and the political
climate is supportive.

The capital flows boom of the 1990s was similar to earlier
episodes in terms of its size; but was different in the variety of
financial instruments used and the variety of recipients

All past episodes of surges in capital flows to emerging
markets have ended in severe international financial crises.

The next decade may well see another capital boom to
emerging markets, accompanied again by high volatility of
capital flows and potential crises. Countries need to adopt
better policies and safety nets for the poor.
Technology will provide one impetus to
capital flows
800
Cellular subscribers (millions)
Telephone traffic minutes (billions)
Personal computers (millions)
Internet users (millions)
600
400
200
0
1990
1992
1994
1996
1998
2002