On April 3, the Committee welcomed 53 members and friends to explore Future Trends in Capital Flows: Opportunities and Challenges in Emerging Markets. Held at the Citi Center in New York, the panel discussed the sources, benefits, and risks of cross-border capital flows, the role of capital controls in a country’s macroeconomic policy toolkit, and the impact of policy decisions by emerging market economies (EMEs) on investors and other actors.
Moderator Paul V. Applegarth, CEO of Value Enhancement International, framed the discussion in terms of the historical precedence of cross-border capital flows and the increasingly important role of capital flows in the global economy. He also highlighted regulation and good governance as contributing factors to the impact of capital inflows.
José Viñals, Director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), opened the discussion by explaining how the IMF’s perspective on capital flows has shifted over time. Describing capital controls as a policy of “last resort,” he discussed how they needed to be part of a broader approach to liberalization and financial sector development. In order to maximize benefits in the long-term, Mr. Viñals suggested that capital controls should be well-timed, targeted, transparent, and temporary – not a substitute for sound macroeconomic policies.
José Antonio Ocampo, Professor of Professional Practice at Columbia University, took a different view. While agreeing that both capital flows and domestic financial systems need to be well-regulated to ensure cross-border flows do more good than harm, he argued that emerging markets should consider capital controls as an institutional component of their macroprudential policy toolkit. He referenced the Latin American, Asian, and other financial crises of recent decades, which had all derived from the boom-bust cycle of capital flows, and urged that countries be able to apply sound counter-cyclical policies when needed, rather than put them in place as a last resort
Guillermo Mondino, Head of Emerging Markets Economics and Strategy at Citi, suggested the need to “de-dramatize” currency war rhetoric, because he did not find evidence to support it. He analyzed trends for two six month periods following rounds of U.S. quantitative easing (QE2 and QE3). In each case, he did not find the data to support much of the rhetoric playing out in the media. Instead, he saw a widening spread of basis points and declining inflows into EME sovereign debt relative to trend, with evidence of “meaningful shrinkage” only in bond yields. He also outlined reasons why capital flows can create risks in emerging market economies, including the “excessive volatility [in foreign exchange] that comes from excessive mobility” and a wide-spread sense of moral hazard. He cautioned against an “excessive” reaction to capital flows in EMEs despite the unprecedented quantitative easing underway in advanced economies.
Finally, Murat Köprülü, Head of Emerging Market at Mariner Investment Group, used the situation in Cyprus as a prism through which to explain how companies evaluate where to invest. He asked “Are there free capital flows?” and “Am I going to be able to repatriate my money when I want to?” comparing these practical questions to more conceptual perspectives. From his point of view, global monetary expansion in advanced economies is clearly having an impact on EMEs; he referenced the appreciation of the Mexican peso as evidence of a nearby emerging market affected by the “wind” of capital from quantitative easing measures by the United States after the 2008 financial crisis. He also expressed great concern about the precedents set by the Cyprus deal and shared Dr. Ocampo’s concern about rules and norms created during times of crisis, rather than those which are institutionalized, transparent, and long-term. In the future, he expected increasing volatility and increasing capital flows to EMEs, because of their high rates of growth.
Participants then had the opportunity to ask panelists about the possibility of so-called bubble-thy-neighbor capital control policies, as well as the comparisons between the IMF’s recommendations for Europe and for emerging markets. Overall, participants and panelists agreed that transparency, good governance, and institutionalized rules of the game help to maximize the benefits and lessen the systemic risks that sizable, volatile flows of cross-border capital regularly bring to emerging markets.
The Committee would like to thank Citi for hosting this event.