Capital Flows to the Final Frontier
IMF Blog, May 24, 2011
Source details
- Canonical URL
- Capital Flows to the Final Frontier
Other formats
Bibliographic details
- Authors: Antoinette M Sayeh
- Published: May 24, 2011
Overview and context
- Author: Antoinette M. Sayeh
- Date: May 24, 2011
- Focus: Evolution of capital flows to sub-Saharan Africa’s “frontier markets” (examples cited: Ghana, Kenya, Mauritius, Zambia) before, during, and after the global financial crisis.
Pre-crisis dynamics
- Frontier markets were a growing destination for capital flows prior to the global financial crisis, driven by improving economic prospects and a global economy "awash with liquidity."
- Most of the increase in inflows since 2000 came from the private sector: "Most of the six-fold increase in inflows since 2000 came from the private sector."
- South Africa and Nigeria typically account for "50–60 percent" of these flows, but the private-sector surge was "true for countries other than South Africa and Nigeria."
Crisis impact
- The global financial crisis triggered a rapid withdrawal of capital from almost all frontier markets, particularly in the form of portfolio flows.
- Fixed-income investments (such as treasury securities) and equities were most evidently affected by the sharp withdrawal of capital.
- Bank credit lines largely recovered after the crisis, "except for Nigeria, where the vestiges of a domestic banking crisis are still lingering."
Post-crisis developments (as of 2011)
- Capital flows were returning "in dribs and drabs" rather than in a broad-based surge.
- Portfolio flows picked up in a few frontier markets: Ghana and Mauritius, and to a lesser degree, Zambia; flows "remained flat in most of the other countries."
- Declines in yields following monetary policy easing reduced appetite among fixed-income investors in some countries, e.g., Kenya and Uganda.
- Foreign direct investment and other equity investment were "not hit too badly during the crisis, and seem to be recovering nicely in most countries."
Macroeconomic management challenges
- Relative scale and volatility:
- Net private capital inflows to sub-Saharan Africa constitute "only about one tenth of total net private flows to emerging and developing countries," yet are large relative to recipient countries' economic size.
- In shallow financial markets, volatility can be acute: "in proportion to reserve money, nonresident holdings of government securities have swung from almost nothing to more than 40 percent in some countries."
- Policy toolkit and IMF guidance:
- The IMF developed a framework to help countries manage large capital inflows.
- Core message: "there is no substitute for implementing appropriate macroeconomic policies," but countries may choose from a "menu of policy options" in response to inflows.
- Examples of policy responses cited: tightening fiscal policy to reduce inflows attracted by high yields from high fiscal deficits; consideration of taxes, certain prudential measures, and capital controls in some cases.
Policy priorities and implications
- Primary policy interest: how to further induce stable and beneficial private flows—which "now exceed official flows"—to support investment and growth.
- Countries should also "stand ready in case sharply rising inflows give rise to macroeconomic management problems."
- Summary assessment: "Except for a few countries, the volume of capital inflows in sub-Saharan Africa’s frontier markets has yet to return to the heydays of 2006-08."
IMF Blog post: "Capital Flows to the Final Frontier" by Antoinette M. Sayeh, May 24, 2011.
Content in this bundle
- 021411a - Inflow Episodes: Summary Statistics
