The flow of capital going into the Emerging Countries

The iif, Institute of International Finance , has published in data  June  1, 2011, the estimates of capital movements  from Mature Economies to Emerging Countries. Figures for the years 2010 ,  2011 and 2012  are extraordinarily high , above the thousand billion dollar, a level never touched in previous years.  (See Table  One ) More than 90% of the flow is made of Private Capital , which in turn is made up of two  main components: Equity Investments - which counts for  57,6%, and is made up of Direct Investments and Portfolio Investments-  and  Private Creditors. 

The flow of capital  going into the Emerging Countries  is  partly used to reinforce their economy and  partly used for investment abroad : the flow of capital into Emerging Countries is matched  by a relevant out flow from these countries . Table two shows how much of this inflow has been used  to increase the Reserves of Emerging Countries,  and the relevant  amount of capital being exported   from  such Countries to elsewhere. In the years  2010 and 2011  about 60% of the flow   went  to increase the reserves , the estimate for 2012 being   slightly lower that 50% . What remains , called “Private outflow”, has been estimated at  573 billion in  2010 , and 654 billion in 2011and 751 billion in 2012. Table three calculates the share of the inflows that effectively leaves the Emerging Countries , creating an important counter flow , more than half  the inflow.  
Table four  shows the  division of the flow into the Emerging Countries  indicating  some decline of Asia  in favour of the European Emerging Countries   which are getting  near the thirty per cent of the total.

The  capital movements have grown in the last years to  a very high  level,  due to a number of factors. Basically, the Emerging Countries have better economic prospects that the mature ones.  The growth of  Mature economies  is estimated for  2011  about 1.9%  and it may reach  2.6% in 2012. The Emerging Countries  all together  will grow 6.4% in  2011 and 6.1 in 2012 , with China around 9% in both years , and India  between 7 and  8 %. Moreover , interest rates are higher in  the poor countries compared with the rich ones, where  the attempt to revive the economy   induces  Central Banks to  keep  the rate of interest quite low.

Basically, the Mature Economies have  a large  surplus of capital  in respect to the decisions  to invest in industry or in  services.  It should perhaps not be called  “ surplus capital” because in many areas of rich countries there are investment needs that are not satisfied , especially in the infrastructure.  However, this capital is a surplus in respect to the  intentions of investors  to invest  in new or old   business ventures.  This surplus had reached a very high level , and that means that operators are not satisfied  of the profitability of increasing investments  in their own country. As the element of risk  is normally higher investing abroad  rather than  investing in your own country , the profit differential must be very high.

The increase in outflow seems to indicate  that the investors do not believe  in  a possible immediate pick up of demand in the Mature     countries. Possibly, the low interest rate offered by many countries to heir citizens helps to increase  capital exports, rather than encouraging investments in the country.  Rich people have more capital that they can invest  profitably. It seems that such a huge transfer of capital  represent now a structural element  of the modern economy, creating a  complex and world-wide system of capital exchanges in both ways.

What is the attitude of receiving countries?  On one side, the inflow is  a Godsend  that  accelerates  their growth , and help to reduce the misery  of the population, in countries that  already grew much quicker than the Mature Countries. On the other hand , such an inflow  may end up increasing the value of the currency of the receiving country , therefore menacing to slow down their exports ,  which are the  basic instrument for their growth. The Institute of International Finance dedicates part   of its Research Note to persuade these countries  not to recur to State controls on the capital imports , which would possibly reduce  the inflow  by discouraging  private investors, and produce a braking effect on the growth of the Emerging Countries.

The iif  paper  proposes  instead  an array of “Macro Prudential Measures”,      like Reserves Requirements Ratios,  Caps on Credit Growth, Cyclical Varying  Provisioning Requirements, Cyclically Varying  Loan-To-Value (LTV)Rations , Counter Cyclical Capital Buffers(Basel III). However , the very fact that the capital inflow  is used to increase the currency  reserves , and that another part of the inflow  be exported somewhere else,  should be enough to reassure  on this point.  Basically , the level of re-export of capital  from Emerging Countries  seems to indicate that   they do not only grow in their  GDP, but also create  a network of interconnections   that can consolidate their economy both as exporters  of their productions  and as participants  to a word wide   interchange of capital.  

 Table one . Capital Inflows  in Emerging Economies (billion dollars) 

                                 
 Table two.  Capital inflow  and outflow , and the effect on the Reserves (billion dollars) 

 Table Three   Share of the capital inflow  sent abroad  by the Emerging countries (In  percent) 

(1) The outflow is higher than the inflow. Africa and Middle East includes  structural capital exporters like oil producing countries

Table  four . Capital flows  by Area (billion dollars)