International capital flows

International Capital Flows and Financial Crises CONTENTS AND PURPOSE  purpose:  define international capital flows  analyze trends in and basic characteristics of international cap

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International Finance

© Mojmir Mrak

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1 Conceptual Bases for the Study of International

Capital Flows

2 International Capital Flows Until the End of 1980s

3 International Capital Flows in the 1990s

4 International Capital Flows and Financial Crises

CONTENTS AND PURPOSE

 purpose:

 define international capital flows

 analyze trends in and basic characteristics of international capital flows to less developed countries

 examine the interconnectedness of international capital flows and

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International Finance

© Mojmir Mrak

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1 Conceptual Bases for the Study of

International Capital Flows

Definition of the International Capital Flow and International Financial Assets Flow

 net capital flow is the sum of net capital flows from:

 long-run debt instruments (credits and bonds)

 ownership instruments (foreign direct investment and portfolio ownership investment)

 irrevocable financial aid

 net financial funds flow=net capital flow-net interest and profit payments

Definition of the International Capital Flow and

the International Financial Assets Flow

 according to the motivation:

 financing international trade

 financing foreign direct investment

 financial arbitrage

 speculative transactions

 portfolio diversification

International Capital Flows Classification

 according to the source of financial assets:

 flows from public sources of capital:

 flows that are financed directly from public financial sources

 flows for which the public sector in the country that provides loans takes on the risk of non-payment, even though the loan was given by the private sector

 flows from private sources of capital

 according to financial conditions:

 international capital flows at commercial conditions

 international financial aid:

 concessional loans

 irrevocable financial aid

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International Finance

© Mojmir Mrak

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International Capital Flows Classification

 according to the financial instrument type:

 equity instruments:

 foreign direct investment

 portfolio equity investment

 debt instruments:

 commercial bank loans

 bonds and portfolio debt investment and supplier credits

 financial grants

International Capital Flows Classification

 financing of economic infrastructure projects

 the longest period of high capital mobility

1920s Period

 financing the public finance expenditures of capital

importing countries  bonds

 end with the emergence of big economic crisis, complete renunciation of inflow of new financial funds into less developed countries

 common characteristics:

 period of growth was followed by a period of quick fall

 international capital flows consisted of private flows exclusively

 sudden drop in international capital flows occurred because of sudden political and/or economic events

 1950s and 1960s (less developed countries):

 very limited international capital flows

 assets from public sources – more than two thirds of all capital inflows

 no access to debt sources of private capital

 changes in the structure of net capital inflows:

 increase in the share of private capital flows

 commercial bank loans become the most common form of private capital inflow

 increased balance-of-payments deficits in oil importing countries

 negative real interest rates in international financial markets

 net capital inflows returned to the level from the beginning

of the decade in the second half of the 1980s:

 increased financing from public sources

 continuing growth of private equity capital flows (foreign direct investment)

 key difference:

 bank exposure in creditor countries relative to debtors in less

developed countries

3 International Capital Flows in the 1990s

Basic Characteristics of International Capital Flows

 size of the flows:

 the amount increased by more than three-fold, financial crises in

1997 and 1998 put an end to the increasing trend at least

temporarily

 average net capital inflow into less developed countries amounted

to 5% of GDP in the period from 1990 to 1998

 structure of flows by sources and instruments:

 dramatic increase in the share of private sources of capital:

 more than seven-fold increase in the amount of private capital inflows

in the 1990-1997 period

 real and nominal decrease in the amount of public capital inflows

Basic Characteristics of International Capital Flows

 structure of flows by sources and instruments:

 change in the structure of private sources of capital:

 increased usage of portfolio investments

 change in the structure of debt financing:

 relative importance of commercial banks has been reduced to the level significantly lower than the one at the beginning of the decade

 change in the structure of clients who were borrowing from the banks:

 mostly countries in the 1970s and 1980s

 project financing in the 1990s

 foreign direct investment:

 the most important and the most stable form of international capital

 structure of flows by regions and countries

Factors of Increased Inflow of

Private Capital Flows

internal factors

external factors

external factors

 structural and cyclical changes in

international financial markets of capital exporting countries

development of information and telecommunication

technologies

development of information and telecommunication

technologies

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International Finance

© Mojmir Mrak

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Factors of Increased Inflow of

Private Capital Flows

 empirical results:

 economic foundations and improved business opportunities in the capital importing countries in connection with changes in international interest rates are the main reasons for increasing the amount of capital inflows

 disagreement on the estimate of the relative importance of each of the mentioned group of factors

4 International Capital Flows and

Financial Crises

Variety of Consequences of International Capital Inflows for Capital Importing Countries

 potential benefits of international capital flows:

 enabling higher rates of investment and consequently faster

economic growth

 positive effects of direct foreign investments and portfolio

investments

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International Finance

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Variety of Consequences of International Capital

Inflows for Capital Importing Countries

 risks related to international capital inflows:

 actual influence depends on:

 the size and structure of capital inflows

 socio-economic characteristics of the country and preferences of economic policy leaders

Variety of Consequences of International Capital

Inflows for Capital Importing Countries

 relationship between potential benefits and risks:

 the more a country is integrated into international financial flows, the less room it has for the maintenance of its key macroeconomic parameters

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International Finance

© Mojmir Mrak

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Interconnectedness of International Capital Flows

and Financial Crises

 all-encompassing process of capital flows liberalization caused an immense increase in international capital

mobility, which was accompanied by more frequent

financial crises

 interconnectedness of international capital flows and

financial crises is characteristic for both industrialized

countries and less developed countries

Definition of Financial Crises and Classifications of Financial Crises

 characteristic elements of financial crisis:

 many economic disequilibria

 usually triggered by a sudden loss of confidence into home

currency and/or domestic banking system, and accelerated by, for example, terminated access to foreign financial sources

 usually involves big falls in the value of wealth and bankruptcies of numerous business subjects

 financial crisis: yes or no?

 size of corrections

 ability of the economic policy to make corrections “softly”