Capital flows in a Globalized World

Countries need foreign currency to pay their import bills.   

They can obtain these from:

- foreign bank loans,

- foreign purchases of stocks or bonds of their countries, or,

- direct foreign investment in local factories.

These flows all are recorded in the capital account of the balance of payments.

Analysts and newspaper headlines tend to focus only on foreign purchases of stocks and bonds.  These are often called "hot money" because foreigners looking for a quick profit can dump stocks and bonds like hot potatoes when crises begin.

Bank loans:  the real hot money 

In recent decades, the most volatile capital flows have actually been bank loans, which are now the real hot money.

China and other emerging markets began opening their doors to foreign capital.  Capital flows rose from 2% of global GDP in 1980 to 16% (a whopping $19 trillion) by early 2007.

Then came the 2008 crisis and optimism about emerging nations vanished. 

By 2014, capital flows had fallen back to $1.2 trillion - once again about 2% of current global GDP.  , Bank lending, the largest portion of capital flows, turned negative during the crisis, indicating that banks were liquidating loans to bring money home.

When capital flows slowed

With capital flows slowing, those countries with persistent current account deficits may run into trouble financing these deficits much sooner.

In the pre-2008 era, the tipping point came when the deficit had been increasing by 5% of GDP for five years in a row.  

In the post-crisis era, the tipping point may come faster and at a lower deficit levels; the 5 percent rule may become a 3% rule.

Cyprus Capital-Controls Q&A

Following the deal between Cyprus and its international creditors on a bailout, there are just as many questions as answers, particularly surrounding the imposition of capital controls. Here our reporters address some of the most pressing issues:

By Matina Stevis and Joe Parkinson

Q: What actions does Cyprus need to take to enforce the capital controls adopted with last week’s legislation?

A: The Cypriot parliament passed enabling legislation last week, giving the central-bank governor and the finance minister the power to take measures to stem capital outflows. The legislation is quite generic and allows the country’s top finance and monetary officials to impose measures ranging from daily ATM withdrawals to freezing domestic interbank lending, suspending direct-debit orders and converting checking accounts into time deposits. The law allows the finance minister or, when relevant, the central-bank governor, to “take whichever restrictive measure [they] consider necessary under the circumstances, for reasons of public order and/or public security.” A decree enacting this bill and laying out the specific details of the capital controls is yet to be issued.

Q: What capital controls are already being enforced (e.g. border checks, ATM limits)

A: Customs officials said border guards at the counrtry’s air and sea ports have been instructed to check baggage and monitor whether travelers are taking more than €10,000 (about $13,000) out of the country. Any amount above that €10,000 threshold can be confiscated. Daily ATM limits vary: at Popular Bank of Cyprus (Laiki), cash-machine withdrawals have been capped at €100 euros; at Bank of Cyprus, the limit is €120. Other ATMs are operating normally.

Q: Can people bypass controls and ATM withdrawal limits by crossing over to Northern Cyprus?

A: At present, border guards at the main pedestrian crossing point on Ledra Street aren’t searching people unless they have intelligence indicating that someone is carrying a large amount of cash. That could change.

Q: How are the ATM limits and bank closures affecting businesses, such as hotels?

A: Many businesses are struggling to understand how the capital-control measures will affect their day-to-day operations, such as their access to cash, meeting payroll and other obligations, as well as the longer-term impact of the financial crisis on their businesses. “In two-three days we need to pay our employees. Will we be able to do that? What happens with the workers who get paid via Laiki?” asks Michalis Pilikos, the president OEB, Cyprus’s national business association. “For many this will be a major wound, we’ll see immediate mass layoffs and closures.” In the meantime, many small businesses are refusing to accept credit-card transactions of electronic transfers out of uncertainty over when banks will reopen and concern they may not be able to recoup the funds. Some larger businesses, like Nicosia’s Hilton Hotel, still accept credit cards but not bank transfers.

Q: When are banks likely to reopen? What will happen when banks reopen? Will even small depositors have access to their deposits?

A: On Monday, March 25, banks were officially closed for a national holiday in commemoration of Greece’s Independence Day. They have been closed since March 16. The Cyprus Central Bank said that all banks, including Bank of Cyprus and Cyprus Popular Bank, will reopen on Thursday at 8:00 a.m. Officials are expected to have the capital-control measures in place before then.

http://blogs.wsj.com/eurocrisis/2013/03/25/cyprus-bailout-qa/

Related:   Cyprus crisis: What are capital controls and why does it need them?

Thailand Encourages Forex Outflows

* FEBRUARY 2, 2010, 11:58 A.M. ET

Thailand Encourages Forex Outflows


By ROBERT FLINT

Thailand has come full circle in its efforts to constrain the baht's appreciation, now encouraging currency outflows after placing short-lived controls on capital inflows a few years ago.

The change in rules had been announced last week, with details revealed Monday in Bangkok. The main points include easing limits on investment and lending abroad as well as looser regulation of corporate management of foreign-exchange risk.

It's another chapter in the struggle by regional Asian currencies to maintain an independent course in the shadow of the Chinese yuan. As long as China keeps the yuan stable against the dollar, its smaller neighbors can't let their currencies appreciate too much so as not to diminish the competitiveness of their exports.

Moreover, regional currencies often serve as a proxy for the yuan, since China's exchange system doesn't allow investors to take positions--and thereby make direct bets--on the yuan.

Thailand has been resisting pressure on the baht from one direction or the other for more than a decade. In the opening round of the Asian financial crisis in the late 1990s, speculation against the baht forced the Thai government to abandon a fixed-rate regime and float its currency. The dollar peaked around THB56 in January 1998, from precrisis levels roughly seven years earlier at THB25.

As the Thai economy recovered, the baht regained a lot of ground on the greenback. Hot money began flowing into the country to take advantage of a booming local stock market, which in turn fed further appreciation of the local currency.

By December 2006, the dollar had reached a nine-year low versus the baht and threatened to dip below THB35 if left unchecked. In response, the military-appointed government of the time imposed capital controls to hinder the inflow of short-term speculative funds.

The announcement of controls had a disastrous effect on the Thai stock market, with equity prices plunging close to 15% in their largest-ever one-day loss. The government immediately scaled back on the controls to cease penalizing foreign investors in Thai equities. All controls were gradually relaxed and finally abolished by a newly elected civilian government in March 2008.

The controls on inflows had only a limited effect on the baht. By the time they ended, the dollar was around THB32. Since then, it has fluctuated between THB32 and THB35 and most recently traded just above THB33.

But with the baht once again threatening to push higher, the Thai government chose to encourage outflows rather than restrict inflows. The big question is whether the latest revision to the rules will be more successful than previous attempts that have included repeated intervention in the dollar's favor by the Bank of Thailand.

"Other countries in the region, like China and South Korea, have also tried encouraging investment outflows to remove some of the upward pressure on the currency," Marc Chandler, global head of foreign exchange at Brown Brothers Harriman, said in a note.

"It is not clear that the measures in those countries have had much impact on outflows or the respective currencies," Mr. Chandler said.

There wasn't much immediate effect on the baht Monday, with the greenback down slightly to THB33.160 from THB33.179 late Friday, in line with declines against other currencies.

Some analysts doubt that Thai companies have enough money to invest abroad on a scale that would have an impact on the baht's exchange rate. In fact, there may be nothing the Thai government can do to guide its currency in the direction it deems best. The baht may remain a prisoner of movements in the yuan and dollar, whatever strategy Thai authorities choose.

Write to Robert Flint at robert.flint@dowjones.com

http://online.wsj.com/article/SB10001424052748704022804575041090733252952.html?mod=WSJ_Markets_section_Currencies