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DEVELOPING COUNTRIES EXPERIENCE WITH CAPITAL ACCOUNT REGULATIONS - - PowerPoint PPT Presentation

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DEVELOPING COUNTRIES EXPERIENCE WITH CAPITAL ACCOUNT REGULATIONS Presentation in the Technical Group Meeting of the Group of 24, Colombo, Sri Lanka, February 28, 2018 Jos Antonio Ocampo Member of the Board Banco de la Repblica,

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DEVELOPING COUNTRIES’ EXPERIENCE WITH CAPITAL ACCOUNT REGULATIONS

Presentation in the Technical Group Meeting

  • f the Group of 24,

Colombo, Sri Lanka, February 28, 2018 José Antonio Ocampo Member of the Board Banco de la República, Colombia

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The major policy issues (1)

Capital flows towards emerging and developing countries are highly pro-cyclical, in terms of availability and cost. This generates two types of risks:

  • Financial-stability risks: boom-bust cycles in the

domestic financial system that may lead to a financial crisis.

  • Macroeconomic-policy risks: pressure to adopt

pro-cyclical macroeconomic management, with large destabilizing effects.

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SLIDE 3

The major policy issues (2)

However, not all booms end up in crises: The critical issues are current account deficits and associated currency appreciation.

  • Reduction of external debts and accumulation
  • f reserves serve as additional buffers against

capital flow volatility.

  • The domestic counterpart of the current account

deficit is important: the long-term effects are very different if they reflect increases in investment rather than reductions in domestic savings.

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Some features of capital flows

  • There is a “volatility hierarchy: FDI is less volatile than

financial flows (portfolio and debt flows).

  • LICs more limited access to private capital flows.
  • Flows towards EMEs are sensitive to monetary policy

in AEs, and to risk perception.

  • Since EMEs markets are relatively small, a small

portfolio decision in AEs has major effects on EMEs

  • Sensitivity has declined due to: reserve accumulation,

development of domestic bond markets, and stronger growth of EMEs.

  • There was a major surge after the 2007-09 North-

Atlantic financial crisis, which has eased, but there have been no “sudden stop” in financing

  • Major disturbance focused on China in 2015-16.
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Pro-cyclical pattern of capital flows (1)

0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 18,0 20,0 22,0

1/01/1998 1/04/1998 1/07/1998 1/10/1998 1/01/1999 1/04/1999 1/07/1999 1/10/1999 1/01/2000 1/04/2000 1/07/2000 1/10/2000 1/01/2001 1/04/2001 1/07/2001 1/10/2001 1/01/2002 1/04/2002 1/07/2002 1/10/2002 1/01/2003 1/04/2003 1/07/2003 1/10/2003 1/01/2004 1/04/2004 1/07/2004 1/10/2004 1/01/2005 1/04/2005 1/07/2005 1/10/2005 1/01/2006 1/04/2006 1/07/2006 1/10/2006 1/01/2007 1/04/2007 1/07/2007 1/10/2007 1/01/2008 1/04/2008 1/07/2008 1/10/2008 1/01/2009 1/04/2009 1/07/2009 1/10/2009 1/01/2010 1/04/2010 1/07/2010 1/10/2010 1/01/2011 1/04/2011 1/07/2011 1/10/2011 1/01/2012 1/04/2012 1/07/2012 1/10/2012 1/01/2013 1/04/2013 1/07/2013 1/10/2013 1/01/2014 1/04/2014 1/07/2014 1/10/2014 1/01/2015 1/04/2015 1/07/2015 1/10/2015 1/01/2016 1/04/2016 1/07/2016 1/10/2016 1/01/2017

Emerging Economies: Spreads and Yields of Sovereign Bonds, 1998-2017

Spreads Yields

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Pro-cyclical pattern of capital flows (2)

  • 600
  • 400
  • 200

200 400 600 800 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Net Private Capital Flows to Emerging Markets, 1990-2016

  • A. Total (billions of current dollars)

FDI Net flows Portfolio Net Flows Other Net Flows Total

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Pro-cyclical pattern of capital flows (3)

  • 300
  • 200
  • 100

100 200 300 400 500 600 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

  • B. Excluding China 1990-2016

FDI Net flows Portfolio Net Flows Other Net Flows Total

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Pro-cyclical pattern of capital flows (4)

  • 40
  • 30
  • 20
  • 10

10 20 30 40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Net Private Capital Flows to Low Income Economies 2003-2016 (billion current dollars)

FDI Net flows Portfolio Net flows Other Net flows Total

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The liberalization process has been uneven in the emerging and developing world

  • 1.000
  • 0.500

0.000 0.500 1.000 1.500 2.000 2.500 Developed OECD Asia Latin America and Caribbean Middle East and North Africa Sub-Saharan Africa

Chinn-Ito Index of Capital Account Openness

1997 2007 2014

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Types of capital account regulations (1)

  • Capital inflow regulations (generally on financial flows,

rarely on FDI)

  • Capital outflow regulations
  • Foreign-exchange related regulations: on lending holding

deposits in foreign currency, or limits on open foreign- exchange positions of financial institutions.

  • Financial sector restrictions: differential treatment of

domestic financial transactions for residents vs. non- residents; restrictions on residents’ accounts abroad. Capital inflow and outflow regulations can be price-based (reserve requirements or taxes), but they can also be administrative/quantity-based. Other regulations are administrative-based.

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Types of capital account regulations (2)

0.200 0.300 0.400 0.500 0.600 0.700 0.800

Capital Account Regulations, 1995-2015 (Erten-Ocampo)

FX-related regulations Capital-outflow regulations Capital-inflow regulations Financial sector restrictions

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Types of capital account regulations (3)

Capital-inflow retrictions Capital-outflow retrictions Financial sector regulations FX-related regulations Upper Middle Income 0.509 0.574 0.278 0.694 Lower Middle Income 0.458 0.521 0.403 0.656 Low Income 0.722 0.778 0.611 0.833 Capital Account Regulations in Emerging and Developing Countries by Income Level, 2015 (Erten-Ocampo)

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Managing financial-stability risks

  • Large empirical literature that indicates that

capital inflow restrictions improve the liability structure of borrowing countries and reduce financial fragilities (Ostry et al, several others)

  • Preventive capital account regulations reduce

the risk of financial crises, acting as “circuit breakers” against contagion effects (Ocampo/Palma and Stiglitz).

  • Capital inflow takes can enhance social welfare

by diminishing the negative effects of capital account volatility (Korinek and Jeanne).

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Macroeconomic-stability risks (1)

  • Capital regulations on inflows taxes and active reserve

management can moderate appreciation during booms (Jeanne, Korinek, Farhi/Werning).

  • Evidence that they reduce capital inflows and

moderate appreciation (Ocampo/Tovar, Edwards/Rigobon)...

  • … but there is broader debate on this issue (De

Gregorio et al., Magud et al, Klein). In cross-country analyses, it is critical whether or not the sample includes developed countries.

  • When exchange rate evolution and reserve

accumulation are included in a variable of “foreign exchange pressure”, positive effects of CARs (Erten/Ocampo).

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Macroeconomic-stability risks (2)

  • Broader evidence that they increase domestic/interest

rate spreads, giving some space for contractionary monetary policies during booms (De Gregorio et al., Villar/Rincon).

  • Imposition of CARs during booms reduces the growth

decline during crises and facilitates the recovery (Ostry et al., Erten/Ocampo).

  • Controls on capital outflows can help moderate

restrictive macroeconomic policies during crises (Ariyoshi et al., but also several programs in recent years, such as that of Iceland).

  • They may be the only way to solve coordination

failures in debt restructuring processes.

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The IMF’s 2012 “institutional view”

  • Capital account interventions recommended as

a policy of “last resort”, once all other macro policy options are exhausted.

  • Preference for capital inflow over outflow

measures.

  • Preference for price-based measures over

quantity-based.

  • “Institutional view” still embraces liberalization

but warns about the costs of pre-mature capital account and financial liberalization.

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SLIDE 17

Conclusion: CARs can play an important role as part of the family of “macroprudential policies”

  • Strong evidence that they promote financial

stability…

  • … and increase the margins for counter-cyclical

macroeconomic policies.

  • To promote financial stablity, they must be

accompanied by strong domestic prudential regulation and supervision.

  • They must be used as a complement, not as a

substitute for counter-cyclical macroeconomic

  • policies. Their use as a substitute may make crises

unavoidable and more severe.

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Conclusion (cont.)

  • No reason why they should be temporary. They

should rather be permanent but managed in a counter-cyclical way.

  • Inflow regulations may have advantages over
  • utflow regulations, and price-based regulations
  • ver quantity/administrative-based regulations, but

the arguments are not compelling.

  • Targeting transactions rather than agents may be

better, but the effects on domestic vs. foreign agents will always be different.

  • Institutional structure and capacity building is
  • essential. It may require maintaining some foreign

exchange controls.

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SLIDE 19

DEVELOPING COUNTRIES’ EXPERIENCE WITH CAPITAL ACCOUNT REGULATIONS

Presentation in the Technical Group Meeting

  • f the Group of 24,

Colombo, Sri Lanka, February 28, 2018 José Antonio Ocampo Member of the Board Banco de la República, Colombia