Privatisation has played an important role in the large FDI flows in Latin America and central Europe during the past two decades. In Latin America, an important part of the structural reforms which started in the s was to privatise government-owned firms. These privatisation programmes gained force during the late s. From to , a total of more than 1, publicly owned firms were privatised in Argentina, Brazil, Chile, Mexico and Venezuela. But behind the regional trend were some country-specific characteristics. While the increase in FDI was largely driven by privatisation of state-owned assets in the service sectors particularly telecommunications and banking in Argentina, Brazil and Chile, investments in Colombia, Peru and Venezuela concentrated in the commodity-related sector.
In the s, the events in Argentina and the slowdown in the privatisation process in other countries contributed to a reduction in FDI flows to Latin America in recent years. Rising portfolio capital inflows have reflected portfolio diversification by international institutional investors such as pension funds and insurance companies in industrial countries see CGFS a. The fact that most EMEs liberalised their equity markets more than a decade ago made this possible Bekaert et al The pattern of equity flows appears to have reflected relative economic performance between source and recipient countries.
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Funds tended to flow into countries where growth was accelerating. Accordingly, interest in emerging market equities strengthened considerably in recent years. Between and , emerging stock markets have outperformed most mature markets by a great margin Graph C6 , left-hand panel. Amounts outstanding of international debt securities — developing countries.
Countries are ranked by outstanding corporate bonds in September The large volume of equity flows was also driven by a significant increase in international placements by emerging market companies.
Apart from fund-raising, the listing of companies in major financial centres could help improve corporate governance because of the more established legal and accounting standards in these centres. Outflows Despite the strong gross portfolio equity inflows, major EMEs on average recorded net private portfolio flows abroad between and , suggesting even stronger gross flows in the opposite direction.
The main component in driving these gross outflows was the acquisition of foreign debt securities by local residents, particularly in Asia. Given that the capital account in China is not fully liberalised, a large part of these transactions might be sourced from other quasi-government entities such as state-owned commercial banks.
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Balance of payments statistics classify these transactions under other headings wherever possible eg direct investment, portfolio investment or changes in reserves. Bank flows that are not captured in these categories are classified as other investment which also includes other external transactions such as trade credits and accounts receivable and payable.
Thus, the other investment category is essentially a residual item that covers capital transactions through banks, but the bank flows in this category are not included elsewhere in the balance of payments statistics. The right-hand panel of Graph C2 shows that bank inflows into EMEs under the other investment category are large and volatile. In sum, in the aftermath of the financial crisis, foreign banks withdrew large amounts of capital from Asia while Asian banks reduced their holdings of foreign assets.
It should be noted that substantial amounts of these banking flows were directed through the two banking centres in Asia — Hong Kong SAR and Singapore — during the early post-crisis years. Excluding the flows from the banking centres, the aggregate gross inflows and outflows of EMEs were less volatile the red lines in Graph C7. In recent years, non-resident bank flows have returned to the EMEs.
Emerging Asia, Hong Kong SAR and Singapore in particular accounted for more than half of the transactions; there was also strong growth in gross bank inflows into Russia and Turkey. National balance of payments data, however, often fail to fully capture the transactions between residents and non-resident banks. The BIS banking statistics provide useful supplementary information. Until the mids, international bank lending to the EMEs primarily took the form of cross-border lending in dollars or other foreign currency. Since then, however, international banks have greatly increased their local presence.
The result has been a substantial increase in local currency lending through their local affiliates Table C3. Notable exceptions are Turkey and central Europe, where the size of international claims is much higher than the average in the early s. While the current account in central Europe can be compared to the pre-crisis Asian experience, some commentators started to draw parallels between the recent expansion of international banking claims in central Europe and the Latin American experience in the s, when some regional economies held substantial amounts of bank-intermediated external debt see Box C3.
However, unlike Latin America in the s, the banking systems in central Europe are now largely foreign-owned with more advanced risk management. Furthermore, instead of using the external funds to finance the local import substitution industries, the increase in emerging market external borrowing is taking place against the background of rapid economic and financial integration with the euro area. Cross-border bank borrowing has played an important role in the emerging market financial crises in the s. First, heavy short-term borrowing of domestic banks in the international interbank market creates a risk for large-scale sudden reversals of bank loans.
Second, domestic banks which borrow in foreign currency and then onlend to finance domestic projects face a currency mismatch or pass this mismatch on to their domestic customers. The BIS data show that the share of short-term international claims in total claims fell sharply in Asia after , and like in other regions, the ratio has stabilised in recent years Graph C8 , left-hand panel. The ratio of international claims on banks in total also declined steadily between and and has since stabilised in all regions Graph C8 , right-hand panel.
These developments add support to the perception that the nature of emerging market bank flows is less risky now than in the mids. There are clear similarities between the current economic and financial conditions in emerging Europe and East Asian economies prior to the —98 crisis. The crisis was preceded by rapid growth in credit to the private sector, with a significant share of loans denominated in foreign currency. East Asian economies also recorded large current account deficits, mainly induced by the private sector.
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These deficits were financed by strong debt inflows, which reversed sharply following the crisis Chart C3. A further similarity lies in exchange rate policies. Prior to the crisis, East Asian economies had fixed nominal exchange rates in their case against the US dollar. Moreover, the economies relied heavily on a single foreign creditor — Japanese banks. Emerging European countries currently show a similar level of dependence on a few European banking system creditors.
An adverse shock to one or more of these foreign banks could result in them withdrawing funds from emerging European countries. But there are also clear differences. First, the strong growth in external and domestic credit in emerging Europe may anticipate a strengthening in GDP growth and policy frameworks due to closer EU integration. Second, the growth in domestic bank credit has been concentrated mainly in the household sector, partly through mortgage lending, rather than in the corporate sector as was the case in East Asia. Third, a large part of most emerging European banking systems is foreign-owned.
These banking groups appear to be financially strong currently, as reflected in standard — albeit backward-looking — measures of financial strength such as capital adequacy ratios and profitability. The foreign subsidiaries should have better risk management techniques in place, more geographically dispersed assets and, in principle, good supervision from the home country on the consolidated entity.
In contrast, Japanese banks, the largest foreign creditor to east Asian economies prior to the crisis, were facing big losses on their domestic exposures at the time.
Moreover, the increase in information on borrowers is higher than was the case in reducing the likelihood of an ill-informed liquidity run. These issues may now merit closer examination in the light of the current ongoing financial crisis. Arguing in the other direction, the main supervisor of the consolidated entity for many emerging European countries is likely to be the foreign home one.
They might be less concerned about any systemic risk that is felt in the host rather than home country ie the risk to a European EME of borrowing from a foreign creditor is likely to be bigger than the risk to the creditor from lending to the EME. The banks — and possibly their supervisors — might also be encouraged by the strong profit margins they are making currently on business in the region without fully factoring in the probability of future losses should risks materialise.
Intervention, sterilisation and domestic financial intermediation Introduction Substantial inflows of foreign capital to the EMEs in the s have not financed current account deficits. Instead, in contrast to earlier episodes, they have in almost all cases taken place against the background of widening current account surpluses.
In effect, foreign currency inflows beginning in have resulted in a substantial increase in foreign exchange reserves Table D1. The unusual context for capital flows in this decade has implications for absorption in the macroeconomic sense of the term. That is, a rise in capital inflows achieves a real transfer of resources only to the extent that the current account deficit present or future increases.
A second implication is that current account surpluses have probably driven up market expectations of long-run equilibrium exchange rates — whatever policies were being pursued in capital-importing countries.
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Unlike capital inflows — particularly portfolio inflows — which may be prone to sudden reversals, current account surpluses can endure and thereby can have persistent effects on the exchange rate. Therefore, investors and currency traders have had a tendency to associate persistent current account surpluses with an appreciation of the long-run equilibrium exchange rate. The payments pattern in this decade has arisen in part because of policy choices in the EMEs. As noted in Chapter B, these policy choices have been conditioned by the accommodative monetary policies in the advanced economies.
A series of crises in the s made many governments in the EME world more wary of reliance on capital inflows, particularly when such inflows were attracted by the combination of excess demand and high nominal interest rates that often resulted from large budget deficits. Most governments became convinced that a much larger buffer of foreign exchange reserves was needed if their economies were to be able to withstand possible future difficulties in external financing.
tr.jybizekadoxu.tk The effective transfer of resources by Germany to pay for reparations imposed after World War I required not only fiscal surpluses to raise local funds but also current account surpluses to effect the real transfer.
Related Capital Markets and Financial Intermediation in The Baltics (Occasional Paper (Intl Monetary Fund))
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