UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
International Finance Mojmir Mrak
CONTENTS
END
Page 1
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
CONTENTS AND PURPOSE
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 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
International Finance Mojmir Mrak
CONTENTS END
Page 2
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS END
Page 3
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
Definition of the International Capital Flow and the International Financial Assets Flow
Gross inflow on the basis of loans Principal payment = = Loans repayment Net capital flow on the basis of loans Interest payment = Net financial funds flow on the basis of loans + FDI, portfolio ownership inv., grants = Net capital flow Interest and profit payment = Net financial funds flow
International Finance Mojmir Mrak
CONTENTS
END
Page 4
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS
END
Page 5
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS END
Page 6
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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 Finance Mojmir Mrak
CONTENTS
END
Page 7
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
International Capital Flows Classification
Table 15. 1.: Classification of international public capital flows
Official flows or official development finance ODF Official development assistance ODA Official grants Multilateral sources Bilateral sources Official concessional loans Multilateral sources Bilateral sources Other ODF Multilateral sources Bilateral sources
Table 15. 2.: Classification of international private capital flows
Private fl ows Pri vate equity flows Direct foreign investment Portfo lio equity investment Pri vate debt flows Co mmercial bank loans Bonds Other
International Finance Mojmir Mrak
CONTENTS
END
Page 8
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
2. International Capital Flows Until the 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
International Finance Mojmir Mrak
CONTENTS
END
Page 9
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak Page 10
CONTENTS
END
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
1970s Period
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
Table 15.3.: Net capital flow into less developed countries in the period from 1970 1990 (mia $)
Public capital flows - Official development assistance - Other ODF Private capital flows - Equity - Direct investment. - Portfolio investment - Debt - Commercial bank loans - Bonds - Other 1970 5,6 4,8 0,7 5,8 2,3 2,3 0,0 3,5 2,3 0,0 0,0 11,3 1975 18,8 14,4 4,4 25,4 7,4 7,4 0,0 18,0 14,2 0,2 3,6 44,2 1980 35,1 24,6 10,5 53,3 5,1 5,1 0,0 48,2 32,2 2,6 13,4 88,4 1985 36,7 25,5 11,1 32,7 11,4 11,3 0,1 21,3 8,3 5,4 7,6 69,4 1990 57,9 46,1 11,8 44,0 28,7 25,0 3,7 15,3 1,7 3,0 10,6 101,9
Sum Source: Managing Capital Flows, 1996, p. 5 (cites World Debt Tables 1996).
International Finance Mojmir Mrak
CONTENTS
END
Page 11
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
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
International Finance Mojmir Mrak
CONTENTS END
Page 12
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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 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
International Finance Mojmir Mrak
CONTENTS END
Page 13
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
3. International Capital Flows in the 1990s Basic Characteristics of International Capital Flows
Table 15.4.: Net capital flow into less developed countries in the period from 1991 2000 (mia $)*
1991 Public capital flows - Official development assistance - Grants - Concessional loans - Other ODF Private capital flows - Equity - Direct investment - Portfolio investment - Debt - Commercial banks - Bonds - Other Sum * Estimate fo r 2000.
60,9 49,5 35,1 14,4 11,4 62,1 43,3 35,7 7,6 18,8 5,0 10,9 2,8 123,0
1992
56,5 46,4 30,5 15,9 10,1 99,3 61,2 47,1 14,1 38,1 16,2 11,1 10,8 155,8
1993
53,6 41,7 28,3 13,4 11,9 166,8 117,6 66,6 51,0 49,2 3,4 36,6 9,2 220,4
1994
48,0 48,1 32,7 15,4 -0,1 175,7 125,2 90,0 35,2 50,5 8,7 38,2 3,6 223,7
1995
55,1 46,2 32,7 13,5 8,9 206,1 143,1 107,0 36,1 63,0 30,5 30,8 1,7 261,2
1996
31,9 39,7 28,1 11,6 -7,8 279,3 180,7 131,5 49,2 98,7 33,7 62,5 2,4 311,2
1997
42,8 35,6 26,1 9,5 7,2 299,8 202,8 172,6 30,2 97,0 45,2 49,0 2,7 342,6
1998
54,6 38,4 27,3 11,1 16,2 280,3 192,4 176,8 15,6 87,9 50,0 40,9 -3,0 334,9
1999
45,3 40,3 28,9 11,4 5,0 219,2 219,9 185,4 34,5 -0,6 -24,6 25,4 -1,6 264,5
2000
38,6 41,6 29,6 11,7 -3,0 257,2 225,9 178,0 47,9 31,3 0,7 30,3 0,3 295,8
Source: Global Development Finance 2001, pp. 36 and 87.
International Finance Mojmir Mrak
CONTENTS
END
Page 14
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS END
Page 15
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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 flows
International Finance Mojmir Mrak
CONTENTS END
Page 16
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
Basic Characteristics of International Capital Flows
structure of flows by regions and countries
Table 15.5.: Geographical structure of capital inflows into developing countries*
Region 1983 1989 - East Asia and Pacific 25 - South Asia 14 - Latin America 17 - Sub-Saharian Africa 23 - North Affrica and Middle East 18 - Europe 3 Sum 100 *Table contains only data for developing countries, not for countries in transition. 1990 1998 42 6 32 10 6 4 100
Source: Trade and Development Report 1999, 1999, p. 103.
International Finance Mojmir Mrak
CONTENTS
END
Page 17
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
Factors of Increased Inflow of Private Capital Flows
internal factors
macroeconomic and structural characteristics political and other development factors
external factors
structural and cyclical changes in international financial markets of capital exporting countries
development of information and telecommunication technologies
International Finance Mojmir Mrak
CONTENTS END
Page 18
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS
END
Page 19
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS
END
Page 20
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
Variety of Consequences of International Capital Inflows for Capital Importing Countries
risks related to international capital inflows:
macroeconomic area:
capital inflows can endanger the competitiveness of the economy because 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
International Finance Mojmir Mrak
CONTENTS END
Page 21
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS
END
Page 22
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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
International Finance Mojmir Mrak
CONTENTS
END
Page 23
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
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 financial system robustness
International Finance Mojmir Mrak
CONTENTS END
Page 24
UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
Definition of Financial Crises and Classifications 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
International Finance Mojmir Mrak
CONTENTS
END
Page 25
