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UNIVERSITY OF LJUBLJANAFACULTY OF ECONOMICS

CONTENTS ENDInternational Finance Mojmir Mrak

Page 1

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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

financial crises

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1. Conceptual Bases for the Study ofInternational 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

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Definition of the International Capital Flow andthe International Financial Assets Flow

Gross inflow on the

basis of loans

Principal

payment

-

Net capital flow on

the basis of loans

Interest

payment

Loans

repayment

FDI, portfolio

ownership inv., grants

Net financial

funds flow on the

basis of loans

Net capital

flow

Interest and profit

payment

Net financial

funds flow

=

=

-

=

-

=

+

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International Capital Flows Classification

according to duration: short-run

long-run

according to the motivation: financing international trade

financing foreign direct investment

financial arbitrage

speculative transactions

portfolio diversification

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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 loanstakes on the risk of non-payment, even though the loan was given by

the private sector

flows from private sources of capital

according tofinancial conditions

: international capital flows at commercial conditions international financial aid:

concessional loans

irrevocable financial aid

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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

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Table 15. 2.: Classification of international private capital flowsPrivate flows

Private equity flowsDirect foreign investment

Portfolio equity investment

Private debt flows

Commercial bank loans

Bonds

Other

Table 15. 1.: Classification of international public capital flowsOfficial flows or official development finance ODF

Official development assistance ODAOfficial grants

Multilateral sources

Bilateral sources

Official concessional loans


Bilateral sources

Other ODF


Bilateral sources

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2. International Capital Flows Untilthe End of 1980s

Period from 1870-1914

prevailingly in the form of bonds, less in the form of

foreign direct investment

financing of economic infrastructure projects

the longest period of high capital mobility

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1920s Period

financing the public finance expenditures of capitalimporting countries bonds

end with the emergence of big economic crisis, complete

renunciation of inflow of new financial funds into lessdeveloped 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

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1970s Period

1950s and 1960s (less developed countries):

very limited international capital flows

assets from public sourcesmore than two thirds of all capital inflows

no access to debt sources of private capitalTable 15.3.: Net capital flow into less developed countries in the period from 1970-

1990 (mia $)1970 1975 1980 1985 1990

Public capital flows 5,6 18,8 35,1 36,7 57,9- Official development assistance 4,8 14,4 24,6 25,5 46,1

- Other ODF 0,7 4,4 10,5 11,1 11,8

Private capital flows 5,8 25,4 53,3 32,7 44,0- Equity 2,3 7,4 5,1 11,4 28,7

- Direct investment. 2,3 7,4 5,1 11,3 25,0

- Portfolio investment 0,0 0,0 0,0 0,1 3,7

- Debt 3,5 18,0 48,2 21,3 15,3

- Commercial bank loans 2,3 14,2 32,2 8,3 1,7

- Bonds 0,0 0,2 2,6 5,4 3,0

- Other 0,0 3,6 13,4 7,6 10,6

Sum 11,3 44,2 88,4 69,4 101,9

Source: Managing Capital Flows, 1996, p. 5 (cites World Debt Tables 1996).

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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

1970s Period reasons for the increase in private net capital inflows into

developing countries:

increased liquidity of commercial banks and their inappropriate

judgment of country risk in less developed countries increased balance-of-payments deficits in oil importing countries

negative real interest rates in international financial markets

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1970s Period

period of financing with bank loans ended abruptly in 1982

with the emergence of the debt crisis

net capital inflows returned to the level from the beginningof 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

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3. International Capital Flows in the 1990sBasic Characteristics of

International Capital FlowsTable 15.4.: Net capital flow into less developed countries in the period from 1991

2000 (mia $)*1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Public capital flows 60,9 56,5 53,6 48,0 55,1 31,9 42,8 54,6 45,3 38,6

- Official development

assistance49,5 46,4 41,7 48,1 46,2 39,7 35,6 38,4 40,3 41,6

- Grants 35,1 30,5 28,3 32,7 32,7 28,1 26,1 27,3 28,9 29,6

- Concessional loans 14,4 15,9 13,4 15,4 13,5 11,6 9,5 11,1 11,4 11,7

- Other ODF 11,4 10,1 11,9 -0,1 8,9 -7,8 7,2 16,2 5 ,0 -3 ,0

Private capital flows 62,1 99,3 166,8 175,7 206,1 279,3 299,8 280,3 219,2 257,2

- Equity 43,3 61,2 117,6 125,2 143,1 180,7 202,8 192,4 219,9 225,9

- Direct investment 35,7 47,1 66,6 90,0 107,0 131,5 172,6 176,8 185,4 178,0

- Portfolio investment 7,6 14,1 51,0 35,2 36,1 49,2 30,2 15,6 34,5 47,9

- Debt 18,8 38,1 49,2 50,5 63,0 98,7 97,0 87,9 -0,6 31,3

- Commercial banks 5,0 16,2 3,4 8,7 30,5 33,7 45,2 50,0 -24,6 0,7

- Bonds 10,9 11,1 36,6 38,2 30,8 62,5 49,0 40,9 25,4 30,3

- Other 2,8 10,8 9,2 3,6 1,7 2,4 2,7 -3,0 -1,6 0,3

Sum 123,0 155,8 220,4 223,7 261,2 311,2 342,6 334,9 264,5 295,8

* Estimate for 2000.

Source: Global Development Finance 2001, pp. 36 and 87.

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Basic Characteristics ofInternational 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 leasttemporarily

average net capital inflow into less developed countries amountedto 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

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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

flows

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structure of flows by regions and countries

Table 15.5.: Geographical structure of capital inflows into developingcountries*

Region 19831989 19901998

- East Asia and Pacific 25 42

- South Asia 14 6

- Latin America 17 32

- Sub-Saharian Africa 23 10

- North Affrica and Middle East18 6- Europe 3 4

Sum 100 100

*Table contains only data for developing countries, not for countries in transition.

Source: Trade and Development Report 1999, 1999, p. 103.

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Factors of Increased Inflow of

Private Capital Flows

macroeconomic and

structural characteristics

political and other

development factors

internal

factors

external

factors

structural and cyclical

changes in

international financial

markets of capital

exporting countriesdevelopment of information

and telecommunication

technologies

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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 ininternational 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

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4. International Capital Flows andFinancial 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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Variety of Consequences of International CapitalInflows for Capital Importing Countries

risks related to international capital inflows:

macroeconomic area:

capital inflows can endanger the competitiveness of the economybecause of home currency appreciation

reduction in domestic savings can occur; increase in openness to

external shocks

reduction in the independence of economic policy conduct

microeconomic area

actual influence depends on: the size and structure of capital inflows

socio-economic characteristics of the country and preferences of

economic policy leaders

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Variety of Consequences of International CapitalInflows 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 macroeconomicparameters

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Interconnectedness of International Capital Flowsand Financial Crises

all-encompassing process of capital flows liberalization

caused an immense increase in international capital

mobility, which was accompanied by more frequentfinancial crises

interconnectedness of international capital flows and

financial crises is characteristic for both industrialized

countries and less developed countries

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Definition of Financial Crises andClassifications of Financial Crises

characteristic elements of financial crisis:

many economic disequilibria

usually triggered by a sudden loss of confidence into homecurrency 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

financial system robustness

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Definition of Financial Crises andClassifications of Financial Crises

classification of financial crises:

currency crisis

banking crisis debt crisis

financial crisis general problematics of crises in less

developed countries in the last two decades

ppt. 1 module 13 (ie)

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