Dealing with the Challenges of Capital Inflows in the Context of Macrofinancial Links

In the wake of the recent global financial crisis, emerging markets have seen a significantly higher degree of volatility in their capital flows. At the onset, all countries experienced sudden stops and increases in risk premia. Following this initial period of uncertainty, financial markets began to differentiate between the countries, and while most developing regions have regained access to both debt and equity issuance, the pace of recovery of capital inflows has been particularly remarkable for some countries. Given the likelihood that the prevailing low interest rates in the developed world will remain for some time to come, and given the prospects of faster growth in emerging markets, it is likely that some emerging markets will experience significant surges in capital flows in the near future. This note examines potential policy responses to maintain macroeconomic and financial sector stability in the face of increased capital inflows.capital, inflows, macrofinancial linkage, financial crisis, emerging markets, volatility, rick, debt, equity, recovery, interest

Structural Vulnerabilities and Currency Crises

This paper examines the role of structural factors - governance and rule of law, corporate sector governance (creditor rights and shareholder rights), corporate financing structure - as well as macroeconomic variables in currency crises. Using a technique known as a binary recursive tree allows for interactions between the various explanatory variables. It is found that structural vulnerabilities play an important role in the occurrence of "deep" currency crises (those with a real GDP growth decline of at least 3 percentage points) and that there are complex interactions between these structural vulnerabilities and macroeconomic imbalances. Copyright 2003, International Monetary Fund

East Asia in the aftermath: Was there a crunch?

This paper investigates whether there was a credit crunch in East Asia during the recent financial and economic crises. Motivated by widespread concern that, over and above any increases in real interest rates, corporates may have also faced credit rationing, we adopt an explicit disequilibrium framework for analyzing the behavior of real credit with a view to assessing whether the supply of, or demand for credit has been a binding constraint. The findings highlight the dynamics associated with a credit crunch. We find evidence of a »credit crunch« in all three crisis countries (Indonesia, Korea, Thailand) in the period immediately following the crisis as the banking system distress deepened, and the supply of (real) credit declined. Thereafter, however, credit demand also fell sharply as economic recession took hold and corporate bankruptcies increased. By the end of the first quarter of 1998, therefore, the constraining factor was the demand for credit. We conclude that, beyond the initial crisis period, there is little evidence of a credit crunch at the aggregate level, although high real interest rates - and credit rationing of individual firms - may have continued to contribute to the difficulties of the corporate sector. --emerging markets,credit crisis

Enhancing the efficiency of securities markets in East Asia

The authors explore the relative efficiency of stock markets across countries using newly available data on transactions costs and the quality of the informational environment of stock markets. These new measures are constructed from firm-level stock returns in a panel of 60 countries for the period 2000-04. The authors then develop a framework to understand the linkages between efficiency, liquidity, and their determinants. To give empirical content to the framework, they study the determinants of transactions costs and the quality of the informational environment. They find that some institutional arrangements-such as the availability of stock lending and short selling-and the openness of markets are associated with lower transactions costs. The authors also find that, although disclosure rules for directors and officers of listed firms are essential, the ability of shareholders to seek redress is more conducive to a better informational environment in stock markets. This in turn serves as the basis for the policy framework and recommendations for the East Asian region. In particular, the region needs to continue to strengthen the implementation and enforcement of corporate governance, to further enhance the market and institutional infrastructure, and focus on policy measures to foster a larger and more diversified investor base to continue to see gains in the efficiency of stock markets.Markets and Market Access,Economic Theory&Research,Financial Intermediation,Access to Markets,Financial Crisis Management&Restructuring

Bank Flows and Basel III—Determinants and Regional Differences in Emerging Markets

The global financial crisis has led to a range of reform proposals concerning the regulatory framework governing the banking sector—collectively referred to as “Basel III.” Although the proposed reforms are expected to generate substantial benefits by reducing the frequency and intensity of banking crises, concerns have been raised that, in the short term, the costs of moving to higher capital ratios may lead banks to raise their lending rates and reduce lending. This note explores the near-term implications of Basel III capital regulations on bank flows to emerging markets, based on an analysis of the key determinants of these flows.Basel III, capital adequacy, financial crisis, financial regulation, financial reform, banking cirsis, lending, emerging markets, trade, financing, SMEs

Finding a balance between growth and vulnerability trade-offs : lessons from emerging Europe and the CIS

This paper examines the growth patterns of emerging Europe and the Commonwealth of Independent States (CIS) countries prior to the global financial crisis. The aim is to draw lessons on what policies can best position these countries going forward to enjoy growth without a buildup in macro and financial vulnerability. Cluster analysis is used to classify these countries across the growth and vulnerability dimensions; namely, a classification into low or high growth outcomes, each of which may occur with low or high vulnerability features. The vulnerability indicators used are multifaceted, covering both the domestic and the external dimensions that have been identified in previous studies as being good indicators of likelihood of crisis -- itself understood as multidimensional. Based on multinomial logit regressions, the initial conditions and the economic policies that might affect the probabilities of being in each of the four possible cluster combinations are examined. Many (if not most) of the countries in the sample experienced very large capital inflows relative to their gross domestic product prior to the crisis, which can complicate macroeconomic management and lead to a buildup of vulnerability. These large inflows were partly due to the high liquidity in global markets and, at least for some countries in the country sample, the particular attractiveness of"new Europe and emerging countries in the region"in the eyes of foreign investors. Nonetheless, the analysis finds strong evidence that the macroeconomic and structural policies that over time influence the structure of the economy, can play a significant role in explaining (and, going forward, in influencing) the different growth and vulnerability patterns experienced by the countries covered in this paper.Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Achieving Shared Growth,Economic Conditions and Volatility

Banking flows and financial crisis -- financial interconnectedness and basel III effects

This paper examines the factors that determine banking flows from advanced economies to emerging markets. In addition to the usual determinants of capital flows in terms of global push and local pull factors, it examines the role of bilateral factors, such as growth differentials and economic size, as well as contagion factors and measures of the depth in financial interconnectedness between lenders and borrowers. The analysis finds profound differences across regions. In particular, in spite of the severe impact of the global financial crisis, banking flows in emerging Europe stand out as a more stable region than is the case in other developing regions. Assuming that the determinants of banking flows remain unchanged in the presence of structural changes, the authors use these results to explore the short-term implications of Basel III capital regulations on banking flows to emerging markets.Debt Markets,Banks&Banking Reform,Emerging Markets,Access to Finance,Economic Theory&Research

Has the Emergence of China Hurt Asian Exports?

We investigate whether the exports of manufactured products by the South Asian and South East Asian countries have been negatively affected by the rise of China. Using a panel data approach, we find that increases in world market shares of China are statistically correlated with declines in world market shares for some Asian countries since 1994, but not before 1994.exports, China, Asian crisis