## Capital Flows to the Final Frontier

_IMF Blog, May 24, 2011_

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**Canonical URL:** [Capital Flows to the Final Frontier](https://www.imf.org/en/blogs/articles/2011/05/24/capital-flows-to-the-final-frontier)

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- [Markdown version](/en/blogs/articles/2011/05/24/capital-flows-to-the-final-frontier/index.md)
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## Bibliographic details
- Authors: Antoinette M Sayeh
- Published: May 24, 2011

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### 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.*

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## Content in this bundle

- **021411a - Inflow Episodes: Summary Statistics**
  - [021411a - Inflow Episodes: Summary Statistics (Markdown version)](/external/np/pp/eng/2011/021411a.pdf.md){rel="alternate" type="text/markdown"}
  - [021411a - Inflow Episodes: Summary Statistics (PDF)](/external/np/pp/eng/2011/021411a.pdf){rel="external" type="application/pdf"}

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## References

- [Regional Economic Outlook](http://www.imf.org/external/pubs/ft/reo/reorepts.aspx?ddlRegions=11&ddlYear=-1)
- [https://www.imf.org/wp-content/uploads/2011/05/afr-reo-capital-flows1.jpg](https://www.imf.org/wp-content/uploads/2011/05/afr-reo-capital-flows1.jpg)
- [main message](http://www.imf.org/external/pubs/ft/survey/so/2011/NEW040511B.htm)

_Source: https://www.imf.org/en/blogs/articles/2011/05/24/capital-flows-to-the-final-frontier_