IFC Satellite meeting at the ISI World Statistics Congress on “Assessing international capital flows after the crisis”

Rio de Janeiro, Brazil, 24 July 2015

Global capital flows and external positions since the global financial crisis1

Gian Maria Milesi-Ferretti, International Monetary Fund

1 This presentation was prepared for the meeting. The views expressed are those of the author and do not necessarily reflect the views of the BIS, the IFC or the central banks and other institutions represented at the meeting.

GLOBAL CAPITAL FLOWS AND EXTERNAL POSITIONS SINCE THE CRISIS

Gian Maria Milesi-Ferretti International Monetary Fund and CEPR

The views expressed are those of the author and not necessarily those of the IMF

Since 2007….

Compression in global current account imbalances…. But still expanding net asset and liability positions. Large compression in global capital flows

Decline in flows to and from AEs… Resilient flows to EMs (particularly FDI, portfolio)

Stop to the growth in external assets and liabilities as a share of global GDP

Presentation

What has happened to “global financial integration” since the crisis?

How has the external balance sheet of emerging markets changed?

Capital flows have slowed after the crisis esp. for advanced economies, financial ctrs

-2

0

2

4

6

8

10

1995 1998 2001 2004 2007 2010 2013

Emg mkts and dev. co.

Advanced econ (non FC)

Financial centers

World Capital Inflows(in percent of world GDP)

Weak capital flows to and from adv. economies

-3000

-2000

-1000

0

1000

2000

3000

4000

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1

Derivatives netOther inv. assets nonbanksOther investment assets banksPortfolio liabilitiesFDI liabilitiesCapital inflows

Flows to emerging markets have been strong… …but declining in recent quarters

-300

-200

-100

0

100

200

300

400

500

2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1

Other incl. derivativesOther investment liabilities banksPortfolio liabilitiesFDI liabilitiesTotal inflows

Growth in cross-border positions stalled Advanced economies and financial centers still dominate

0%

50%

100%

150%

200%

250%

1990 1993 1996 1999 2002 2005 2008 2011 2014

Emerging and developing countries

Financial centers

Advanced (non FC)

Global external assets (ratio of world GDP)

..despite the rising share of EMDEs in world GDP

0%

20%

40%

60%

80%

100%

120%

1990 1993 1996 1999 2002 2005 2008 2011 2014

Emerging and developing countriesFinancial centersAdvanced (non FC) Shares of world GDP

What explains the break in the upward trend of financial integration?

Big reduction in cross-border debt holdings Loans Securities

This reflects Bank deleveraging More fragmentation within the euro area

But also large increase in EM share of world GDP EMs have smaller external assets and liabilities

Declining world external assets and liabilities to world GDP, 2007-2014….

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Assets Liabilities

Reserves

Debt

Derivatives

FDI

Equity

….mostly reflecting deleveraging by banks

0%

10%

20%

30%

40%

50%

60%

70%

1990 1994 1998 2002 2006 2010 2014

Claims on nonbanks

Claims on banks

External assets of BIS-reporting banks (in percent of global GDP)

…and a large decline in intra euro area claims

0%

50%

100%

150%

200%

250%

300%

2001 2004 2007 2010 2013

FDIPortfolio equityOther investmentPortfolio debt

Intra euro-area external liabilities (percent of euro area GDP)

Change in AE external balance sheet, 2007-14

-20%

-10%

0%

10%

20%

30%

40%

Assets Liabilities

Derivatives

Reserves

Other investment

FDI

Portfolio equity

Portfolio debt

Change in EM balance sheet, 2007-14: more modest

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Assets Liabilities

Derivatives

Reserves

Other investment

FDI

Portfolio equity

Portfolio debt

Much ado about portfolio flows?

EM aggregate masks substantial heterogeneity Portfolio debt liabilities

Change in external balance sheet, 2007-14 (percent of GDP)

-15%

-10%

-5%

0%

5%

10%

15%

Assets Liabilities

DerivativesReservesOther investmentFDIPortfolio equityPortfolio debt

Latin America and Caribbean

Change in ratio of portfolio liabilities to GDP, 2007-14

-20

-15

-10

-5

0

5

10

15

20

25 Portfolio equityPortfolio debt

Challenges of measuring financial integration

Difficulty in determining ultimate exposures Offshore activity / inflation of cross-border positions

FDI: SPVs, SFIs etc (Netherlands has $4 trn in FDI

assets and liabilities, Luxembourg over $3 trn) Portfolio equity: Investment fund industry Other investment: routing of bank flows

Where do we go from now? Short term

Advanced economies:

Cross-border role of banks? Intra euro area flows?

Risks of reduced flows to EMs? Gradual normalization of US monetary policy Growth in EMs below pre- and post-crisis trends

Where do we go from now? Medium term

Forces pushing for increased integration of EMs

Domestic financial development Increased presence of EM financial institutions on

global markets Gradual development of institutional investors

(example of Chile)

More FDI