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8/2/2019 Ppt. 1 Module 12 (IE)
http://slidepdf.com/reader/full/ppt-1-module-12-ie 1/25
UNIVERSITY OF LJUBLJANAFACULTY OF ECONOMICS
CONTENTS ENDInternational Finance© Mojmir Mrak
Page 1
8/2/2019 Ppt. 1 Module 12 (IE)
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UNIVERSITY OF LJUBLJANAFACULTY OF ECONOMICS
CONTENTS ENDInternational Finance© Mojmir Mrak
Page 2
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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Page 3
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
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Page 4
Definition of the International Capital Flow and the 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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Page 5
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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Page 6
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 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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Page 7
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
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Page 8
International Capital Flows Classification
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
Multilateral sources
Bilateral sources
Other ODF
Multilateral sources
Bilateral sources
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Page 9
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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Page 10
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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Page 11
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 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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Page 12
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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Page 13
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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Page 14
3. International Capital Flows in the 1990s Basic 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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Page 15
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 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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Page 16
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
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Page 17
Basic Characteristics of International Capital Flows
structure of flows by regions and countries
Table 15.5.: Geographical structure of capital inflows into developingcountries*
Region 1983 – 1989 1990 – 1998
- 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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Page 18
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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Page 19
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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Page 20
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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Page 21
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 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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Page 22
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 macroeconomicparameters
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Page 23
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 frequentfinancial crises
interconnectedness of international capital flows and
financial crises is characteristic for both industrialized
countries and less developed countries
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Page 24
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 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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Page 25
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