International Monetary Fund

World World

Economic Economic

OutlookOutlook

Spring 2011Spring 2011

Bangko Sentral ng PilipinasMay 6, 2011

Chapter 4. International Capital Flows:

Reliable or Fickle?

Chapter 4. International Capital Flows:

Reliable or Fickle?

John Bluedorn, Rupa Duttagupta, Jaime Guajardo, and Petia Topalova

With support fromAngela Espiritu, Murad Omoev, Andy Salazar

and Jessie Yang

Sharp recovery in capital flows…

3

Foreign direct investment Portfolio equity Portfolio debt

Other bank and private Other government Derivatives

Total

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

1980 1984 1988 1992 1996 2000 2004 2008H1 2010H1

Total Net Inflows to Advanced Economies

(percent of aggregate GDP)

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

1980 1984 1988 1992 1996 2000 2004 2008H1 2010H1

Total Net Inflows to Emerging Markets

(percent of aggregate GDP)

How does the post-crisis recovery in flows look like?

Looking at history, how stable and persistent are flows?

How have net flows to EMEs behaved under easy global financing

conditions?

Does a country’s direct U.S. financial exposure affect the sensitivity of

its net flows to U.S. interest rate hikes?

Capital flows are fickle

Volatility has increased slightly over time; show low

persistence

Debt-creating flows more fickle than others

Greater direct U.S. financial exposure ⇒⇒⇒⇒ negative

additional effect on net flows from U.S. interest

rate hikes

Capital flows to EMEs rise and fall with easy global

financing conditions

4

Summary results

-4

-3

-2

-1

0

1

2

3

4

5

2002Q1 2004Q1 2006Q1 2008Q1 2010Q1

-4

-3

-2

-1

0

1

2

3

4

5

2002Q1 2004Q1 2006Q1 2008Q1 2010Q1

Advanced Economies Emerging Market Economies

The recovery of capital flows to EMs—

extraordinary in pace, but not in levels reached

5

FDI

Portfolio debt

Portfolio equity

Bank and other

private

TotalNet Private Flows(Percent of GDP, 4Q moving avg.)

6

Current flows to EMEs are typically below historical surges. Recent episode led by portfolio debt, followed by

bank & other private flows

1991–97 2004–07 2010:Q1-Q3

-2

-1

0

1

2

3

4

5Emerging Latin America

1991–97 2004–07 2010:Q1-Q3

-2

0

2

4

6

8

10 Emerging Europe

1991–97 2004–07 2010:Q1-Q3

-2

-1

0

1

2

3

4

5Emerging Asia

1991–97 2004–07 2010:Q1-Q3

-2

-1

0

1

2

3

4

5Other Emerging Economies

Net Private Flows(Percent of GDP)

FDI

Portfolio debt

Portfolio equity

Bank and other

private

Total

The recent episode (so far) contrasts with the historical trend of a falling share of debt-creating flows

7

0%

20%

40%

60%

80%

100%

1980s 1990s 2000s 1980s 1990s 2000s 1980s 1990s 2000s

Advanced economies Emerging economies Other developing

economies

Foreign direct investment Portfolio equity

Portfolio debt Other bank and private

The Relative Importance of Various Types of Flows

(Percent of total)

Volatility of flows has increased slightly over time. Bank & other private flows usually most volatile

8

0

1

2

3

4

5

6

1990 1995 2000 2005

Advanced Economies: Total Net Private Flows

(median)

2009

0

1

2

3

4

5

6

7

1990 1995 2000 2005

Emerging Market Economies: Total Net Private

Flows

(median)

2009

0

1

2

3

4

5

6

1990 1995 2000 2005

Advanced Economies: By Type

(median)

2009

0

1

2

3

4

5

6

7

1990 1995 2000 2005

Emerging Market Economies: By Type

(median)

2009

Interquartile range of total net

private capital flows

Total net private capital flows Foreign direct investment

Portfolio equity

Portfolio debt

Bank and other private

Standard deviation of net capital flows

(10-year rolling window)

Persistence of net flows is low. Portfolio debt flows are usually least persistent.

9

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1990 1995 2000 2005

Advanced Economies: Total Net Private Flows

(median)

2009

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1990 1995 2000 2005

Advanced Economies: By Type

(median)

2009

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1990 1995 2000 2005

Emerging Market Economies: Total Net Private

Flows (median)

2009

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1990 1995 2000 2005

Emerging Market Economies: By Type

(median)

2009

Persistence (AR1 coefficients) of net capital

flows (10-year rolling window)

Interquartile range of total net

private capital flows

Total net private capital flows Foreign direct investment

Portfolio equity

Portfolio debt

Bank and other private

Low Global Interest Rates

1987, 1991-94, 1999, 2001-

10:Q3

10

Capital flows to EMEs ↑↑↑↑ when (1) easy external financing conditions, and (2) EMEs had strong growth performance

Before During After Before During After

-1

0

1

2

3

4

-1

0

1

2

3

4

Before During After

Foreign direct

investment

Portfolio debt

flows

Portfolio equity

flows

Bank and other

private flows

Total

Low Global Risk Aversion

(VIX) 1989, 1991-

96, 1999, 2004-07

Low Interest Rate, Low VIX

and High Growth Differential

1991-93, 1996, 2004-07

Net Private Flows(Percent of GDP)

11

Net flows strongest when global interest rate and risk aversion both low

-1

0

1

2

3

4

3.2

1.2

1.6

1.0

Low global interest

rates and low risk

aversion 1991-

94, 1996, 2004-07

Low global interest

rates and high risk

aversion

1987, 1999, 2001-03,

2008-10:Q3

High global interest

rates and low risk

aversion 1989, 1995

High global interest rates

and high risk aversion

1986, 1997-98, 2000

Net Private Flows(Percent of GDP)

Foreign direct

investment

Portfolio debt

flows

Portfolio equity

flows

Bank and other

private flows

Total

Regression analysis—two innovations

Use economies’ direct financial exposure to the United

States to identify difference in effect of U.S. rate hikes on net

flows to financially exposed versus unexposed economies.

• Regression also controls for all possible global factors that affect net flows to all

economies in the same way

Distinguishes difference in effects of unanticipated versus

actual U.S. interest rate changes.

U.S

. Dire

ct F

inan

cia

l Exp

osu

re W

eig

ht

(Proportion of total external assets and liabilities

that are U.S. assets and/or liabilities)

13

0.0

0

0.0

5

0.1

0

0.1

5

0.2

0

0.2

5

0.3

0

0.3

5

0.4

0

0.4

5

0.5

0

CanadaMexico

UruguayChinaKoreaIsraelBrazil

GuatemalaJapan

ColombiaChile

United KingdomAustralia

PhilippinesEl Salvador

PeruThailand

NetherlandsIndia

NorwayEgypt

MalaysiaArgentina

EcuadorNew Zealand

SwedenIndonesia

BelgiumSouth Africa

RussiaHungary

IrelandPolandFinlandTurkey

GermanyFrance

DenmarkIceland

Czech RepublicSpain

ItalyAustria

RomaniaJordan

UkraineGreece

BulgariaMoroccoPortugal

Unanticipated only small part of realized rate changes. (Percentage points)

14

-0.5

-0.3

-0.1

0.1

0.3

0.5

-2

-1

0

1

2

1989q1 1992q1 1995q1 1998q1 2001q1 2004q1 2007q1 2010q1

Unanticipated rate change

(left scale)

Realized rate change

(right scale)

0.0

-3

-2

-1

0

1

-1 0 1 2 3 4 5 6 7 8

-3

-2

-1

0

1

-1 0 1 2 3 4 5 6 7 8 15

Greater direct U.S. financial exposure ⇒⇒⇒⇒ negative additional effect on net flows from U.S. interest rate hikes. Impact of realized rate change is much smaller.

Emerging Market Economies Advanced Economies

Equivalent realized rise in U.S. monetary policy rate (12 bp)

Unanticipated rise in U.S. monetary policy rate (5 bp)

Change in net flows(Percent of GDP)

Quarters after impact Quarters after impact

Negative additional effect sharper under easy global financing conditions

16

-4

-3

-2

-1

0

-1 0 1 2 3 4 5 6 7 8

Baseline

Low global risk aversion

Low global interest rates

Low global interest rates and risk aversion

Quarters after impact

Change in net flows(Percent of GDP)

For financially exposed EMEs, negative additional sensitivity to U.S. rate hike positively correlated with:

17

Greater integration with global financial markets

Low domestic financial depth

Flexible exchange rate regimes

Weak growth performance

Conclusion ⇒⇒⇒⇒ variable capital flows are a fact of life

Net flows exhibit low persistence and volatility has increased

over time. Debt-creating flows more fickle.

Net flows to EMEs rise and fall with easy global financing

conditions.

Greater direct financial exposures to the United States ⇒negative additional effect on net flows in response to U.S.

monetary tightening.

These additional effects stronger when U.S. rate hike

unanticipated and occurs under easy global financing

conditions.