Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
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5- CONCLUSION
Capital flows have become more significant in developing countries over the past decade or so,
although in absolute terms, inflows remain well below the pre-crisis peak.
Developing countries- many of which are COMCEC Members – have also become more
attractive as investment locations as a result of the easy global financing conditions facilitated
largely by quantitative easing in the US as well as a stimulus programme by the Chinese
authorities —with relatively low interest rates in advanced economies, and high investor risk
appetite “pushing” money into emerging markets. Within these emerging markets, gross
outflows have been too small to offset the sharp rise in gross inflows during such conditions,
so that net flows are largely driven by foreign investors.
Although FDI has played a significant role in driving capital flows, developing countries have
been finding other ways to attract capital flows, for example through bond issuance. In Africa,
the size of the international bond market may still be small, but recent activity has led to
African countries raising the largest ever amount of hard currency from international capital
markets, breaking a record set in 201087. Uganda, Mozambique and Cameroon are all expected
to issue bonds for the first time in the next years and despite concerns that the higher interest
rates arising from a tightening of US monetary policy will have an impact on portfolio inflows
to African economies, sentiment remains positive that investor interest will stay strong, thanks
to the bright macroeconomic outlook for Africa over the short to medium term.
Looking across the OIC membership as a whole, capital flows actually remain relatively low for
the majority of the countries. Of the 48 countries that belong to the low-income, lower-middle
income and upper-middle income groups (which together account for 97% of the overall OIC
population), only seven countries have capital inflows totalling over $10bn. Challenges remain
across all the income groups to attract stable capital flows, although progress has been made
to some degree in overcoming the various barriers. Nonetheless, across all the income groups,
there are some countries that are fragile states and others which face political transition and
the need to implement structural reform to overcome factors such as corruption, weak
governance and low institutional capacity. These factors tend to affect investor confidence
quite significantly, and to offset the positive aspects feeding into a country’s investment
potential.
With respect to each of the income groups, a number of key issues can be identified in relation
to attracting capital flows although it must be stressed that these are not necessarily specific to
a particular income group alone.
87 See for example the FT, ‘Africa bond issues soar to record sums’, October 8 2013