Misconception : capital should flow from rich countries to poor ones , which have less capital and offer higher returns! By borrowing abroad, LDCs should be able to boost investment and the growth rate.
Facts : capital is flowing « uphill » and the US current account deficit is financed by emerging countries’ purchase of US Treasury securities
Facts : LDCs have limited capacity to absorb foreign capital, due to underdeveloped financial systems. Dynamic growth boosts saving relative to investment, hence a current account surplus (China!).
Facts : US bond yields are 2% lower than they otherwise would be, thanks to the purchase of US securities by China and other EMCs. If these countries loose their appetite for US assets, bond yields could jump and the dollar plunge!
Source: IMF/Prasad-Rajan, 2006
US Current account deficit in US$ billion -7% PBI US Treasury, IMF
Global competition in financial markets DEFICIT SURPLUS ? -$800 billion = $2200 million/day ? ?
Who finances whom? Current account balances of OECD and EMCs (billions of US$) Source: FMI/2006 Asian crisis
Why do EMCs show such large CA surpluses and rising reserves?
1982 debt crisis + 1994 Tequila crisis + 1997 Asia crisis + 1998 Russian crisis + 2001 Argentina crisis
Strong IMF-monitored adjustment + economic and trade liberalization
Devaluation + Boost in investment ratio= trade and current account surpluses
Improvement in debt indicators!
Successful economic adjustment: Improvement in EMCs’ solvency ratios (drop in Debt/X %) Source: FMI/2007
México consigue el Grado de Inversión Embi+ Mexico Current account surpluses + Global liquidity: Sharp drop in the cost of borrowing of EMCs BCRP, Banco Central de Chile
Net FDI and portfolio capital flows to EMCs US$ billion Fuente: IMF/IIF
Total FDI inflows in US$ trillion Post-2003 bounceback has been driven by emerging markets. However, FDI flows to emerging markets will remain buoyant in 2006-10, averaging over US$400bn per year, but growth rates will be modest as privatisation tails off and the global economy slows.
Incestuous globalization? The key recipients of FDI In US$ billion
OECD Country risk classification in 2007 Gabon RCI Guatemala Mexico Kuwait Argentina Brazil Vietnam Russia Thailand Trinidad & Tobago Cameroon Niger Nigeria Pakistan Turkey Bulgaria South Africa Hungary Bolivia Haiti Albania Peru Algeria Morocco Israel Chile 7 6 5 4 3 2 1
“Any agency which rated the Republic of Korea at the high investment grade rating of AA- (in the case of Fitch IBCA and S&Ps) or A1 (in the case of Moody’s) before the crisis, and which now rates Korea at a speculative grade B-, was clearly either wrong initially or subsequently. Clients are entitled to expect us to perform better in the future!”
EUROMONEY Risk Rating the higher the ranking, the higher the risk 107 46 78 65 29 2000 81 98 91 49 45 Indonesia 46 46 56 35 33 Malaysia 75 53 55 57 55 Philippines 49 49 54 51 45 Thailand 28 44 42 30 28 Korea 2005 1999 1998 1997 1996
Macroeconomic success of the tigers… until 1996 Source: IMF/International Financial Statistics 1999
Prudent macroeconomic management of the tigers: low inflation, low budget deficits Fuente: IMF/ International Financial Statistics 1999
Example: Russia attracts large capital inflows thanks to a strong rating by Coface and Fitch… despite bad competitiveness and governance indicators! Transparency International 126 / 158 CPI PriceWaterhouseCoopers 46 / 59 Opacity Index World Economic Forum 75 / 117 Growth Competitive Index OECD 158 / 209 Country risk Fitch BBB stable Credit Rating Coface B Credit Rating World Bank 70 / 155 Ease of Doing Business UNDP 62 / 177 HDI Heritage Foundation 122 / 157 Económic Freedom
Ratings and the US subprime mortgage-backed securities market in the summer of 2007
Rating agencies responded to issuers’ rating requests and kept a AAA rating for debts whose collateral was rapidly deteriorating!
Ratings agencies failed to warn investors about the risk of complex financial instruments
Challenge: how measuring liquidity and market value risks?
The Global Competitiveness Report , which examines the growth prospects of 80 countries, remains the most up-to-date and comprehensive data source available on the comparative strengths and weaknesses of leading economies of the world.
Countries in The Global Competitiveness Report are ranked by the Growth Competitiveness Index (GCI) (GCI Rankings) and the Microeconomic Competitiveness Index (MICI) (MICI Rankings), which combined encapsulate the relative strengths and weaknesses of growth within each economy .
Davos-WEF 2007 Competitiveness Index 30 Tunisia 15 Israel 29 Czech Republic 14 Iceland 28 Spain 13 Taiwan, China 27 Chile 12 Norway 26 Malaysia 11 Hong Kong SAR 25 Estonia 10 United Kingdom 24 Korea, Rep. 9 Netherlands 23 New Zealand 8 Germany 22 Luxembourg 7 Japan 21 Ireland 6 United States 20 Belgium 5 Singapore 19 Australia 4 Denmark 18 France 3 Sweden 17 Austria 2 Finland 16 Canada 1 Switzerland
Extent to which basic, technological, scientific and human resources meet the needs of business. (90 criteria) Infrastructure Extent to which enterprises are performing in an innovative, profitable and responsible manner. (66 criteria) Business Efficiency Extent to which government policies are conducive to competitiveness. (84 criteria) Government Efficiency Macro-economic evaluation of the domestic economy. ( 74 criteria) Economic Performance