Barriers and Opportunities for Enhancing Capital Flows

In the COMCEC Member Countries

inflows to developing countries suffered another reversal as the European debt crisis

worsened and global economic markets deteriorated sharply in the third quarter of that year.

Since 2011, however, private capital flows to developing countries have strengthened. This

strong performance has taken place against a backdrop of a more favourable macroeconomic

environment. More specifically:



Growth prospects among emerging market economies – in particular those in Asia and

Latin America – although lower than during the boom years, remain much brighter

than those in the developed world.



A drop in risk aversion in financial markets in the latter part of 2012, as the European

Central Bank’s Outright Monetary Transactions programme reduced the tail risk of a

break-up of the euro zone, has led to strong rises in global stock markets and

narrowing of risk spreads.



Monetary conditions in developed economies have been extraordinarily easy, with the

increase in the US money supply stemming from the US Federal Reserve’s quantitative

easing (QE) programme driving capital flows to emerging markets.

Despite positive developments in private capital flows to developing countries, foreign direct

investment (FDI) inflows fell 18% to $1.35trn in 2012, amid fragile economic conditions and

policy uncertainty across the globe. Much of this drop-off was experienced in developed

countries – for example Europe as a whole saw a 42% reduction in FDI in 2012 from the

previous year, with Germany experiencing an 85% decrease from the previous year.

Nevertheless, developing countries attracted more FDI than developed countries for the first

time in 2012, accounting for 52% of global FDI flows. At the same time, developing countries

have become a growing source of FDI outflows, accounting for a third of global FDI outflows in

2012

During the last decade and a half there has been a shift in the composition of international debt

flows. Not least, bond issuance and bank lending to developing countries have shifted since the

global financial crisis. Some developing countries did not have access to foreign-currency bond

markets and were therefore dependent upon bank lending for foreign-currency loans (many of

them did not fulfil the institutional and legal requirements to issue international bonds); now,

banks have tightened lending, while increased global liquidity, better growth prospects and

stronger balance sheets have made the bond market more receptive to issues from emerging

markets. Bond issuance now accounts for over half of debt flows to developing countries,

compared to less than a third between 2005 and 2008. As countries including Bangladesh,

Mozambique and Nigeria issue international bonds for the first time, experts believe this shift

will continue for the foreseeable future.

“Capital Flows to Emerging Market Economies”, Bank of International Settlements (BIS), January 2013

World Investment Report 2013,

UNCTAD

World Bank blog, Dilek Aykut, March 2013, ‘The changing landscape of international debt flows: rising bond issuance amid

declining bank lending’