UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS CONTENTS AND PURPOSE Conceptual Bases for the Study of International Capital Flows International Capital Flows Until the End of 1980s International Capital Flows in the 1990s International Capital Flows and Financial Crises purpose: define international capital flows analyze trends in and basic characteristics of international capital flows to less developed countries examine the interconnectedness of international capital flows and financial crises International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Conceptual Bases for the Study of International Capital Flows Definition of the International Capital Flow and International Financial Assets Flow net capital flow is the sum of net capital flows from: long-run debt instruments (credits and bonds) ownership instruments (foreign direct investment and portfolio ownership investment) irrevocable financial aid net financial funds flow=net capital flow-net interest and profit payments International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Definition of the International Capital Flow and the International Financial Assets Flow International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows Classification according to duration: short-run long-run according to the motivation: financing international trade financing foreign direct investment financial arbitrage speculative transactions portfolio diversification International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows Classification according to the source of financial assets: flows from public sources of capital: flows that are financed directly from public financial sources flows for which the public sector in the country that provides loans takes on the risk of non-payment, even though the loan was given by the private sector flows from private sources of capital according to financial conditions: international capital flows at commercial conditions international financial aid: concessional loans irrevocable financial aid International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows Classification according to the financial instrument type: equity instruments: foreign direct investment portfolio equity investment debt instruments: commercial bank loans bonds and portfolio debt investment and supplier credits financial grants International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows Classification International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows Until the End of 1980s Period from 1870-1914 prevailingly in the form of bonds, less in the form of foreign direct investment financing of economic infrastructure projects the longest period of high capital mobility International Finance © Mojmir Mrak CONTENTS END Page UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS 1920s Period financing the public finance expenditures of capital importing countries bonds end with the emergence of big economic crisis, complete renunciation of inflow of new financial funds into less developed countries common characteristics: period of growth was followed by a period of quick fall international capital flows consisted of private flows exclusively sudden drop in international capital flows occurred because of sudden political and/or economic events International Finance © Mojmir Mrak CONTENTS END Page 10 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS 1970s Period 1950s and 1960s (less developed countries): very limited international capital flows assets from public sources – more than two thirds of all capital inflows no access to debt sources of private capital International Finance © Mojmir Mrak CONTENTS END Page 11 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS 1970s Period reasons for the increase in private net capital inflows into developing countries: increased liquidity of commercial banks and their inappropriate judgment of country risk in less developed countries increased balance-of-payments deficits in oil importing countries negative real interest rates in international financial markets changes in the structure of net capital inflows: increase in the share of private capital flows commercial bank loans become the most common form of private capital inflow International Finance © Mojmir Mrak CONTENTS END Page 12 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS 1970s Period period of financing with bank loans ended abruptly in 1982 with the emergence of the debt crisis net capital inflows returned to the level from the beginning of the decade in the second half of the 1980s: increased financing from public sources continuing growth of private equity capital flows (foreign direct investment) key difference: bank exposure in creditor countries relative to debtors in less developed countries International Finance © Mojmir Mrak CONTENTS END Page 13 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows in the 1990s Basic Characteristics of International Capital Flows International Finance © Mojmir Mrak CONTENTS END Page 14 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Basic Characteristics of International Capital Flows size of the flows: the amount increased by more than three-fold, financial crises in 1997 and 1998 put an end to the increasing trend at least temporarily average net capital inflow into less developed countries amounted to 5% of GDP in the period from 1990 to 1998 structure of flows by sources and instruments: dramatic increase in the share of private sources of capital: more than seven-fold increase in the amount of private capital inflows in the 1990-1997 period real and nominal decrease in the amount of public capital inflows International Finance © Mojmir Mrak CONTENTS END Page 15 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Basic Characteristics of International Capital Flows structure of flows by sources and instruments: change in the structure of private sources of capital: increased usage of portfolio investments change in the structure of debt financing: relative importance of commercial banks has been reduced to the level significantly lower than the one at the beginning of the decade change in the structure of clients who were borrowing from the banks: mostly countries in the 1970s and 1980s project financing in the 1990s foreign direct investment: the most important and the most stable form of international capital flows International Finance © Mojmir Mrak CONTENTS END Page 16 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Basic Characteristics of International Capital Flows structure of flows by regions and countries International Finance © Mojmir Mrak CONTENTS END Page 17 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Factors of Increased Inflow of Private Capital Flows internal internal factors factors external external factors factors macroeconomic and structural characteristics political and other development factors structural and cyclical changes in international financial markets of capital exporting countries developmentof ofinformation information development andtelecommunication telecommunication and technologies technologies International Finance © Mojmir Mrak CONTENTS END Page 18 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Factors of Increased Inflow of Private Capital Flows empirical results: economic foundations and improved business opportunities in the capital importing countries in connection with changes in international interest rates are the main reasons for increasing the amount of capital inflows disagreement on the estimate of the relative importance of each of the mentioned group of factors International Finance © Mojmir Mrak CONTENTS END Page 19 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS International Capital Flows and Financial Crises Variety of Consequences of International Capital Inflows for Capital Importing Countries potential benefits of international capital flows: enabling higher rates of investment and consequently faster economic growth positive effects of direct foreign investments and portfolio investments International Finance © Mojmir Mrak CONTENTS END Page 20 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Variety of Consequences of International Capital Inflows for Capital Importing Countries risks related to international capital inflows: macroeconomic area: capital inflows can endanger the competitiveness of the economy because of home currency appreciation reduction in domestic savings can occur; increase in openness to external shocks reduction in the independence of economic policy conduct microeconomic area actual influence depends on: the size and structure of capital inflows socio-economic characteristics of the country and preferences of economic policy leaders International Finance © Mojmir Mrak CONTENTS END Page 21 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Variety of Consequences of International Capital Inflows for Capital Importing Countries relationship between potential benefits and risks: the more a country is integrated into international financial flows, the less room it has for the maintenance of its key macroeconomic parameters International Finance © Mojmir Mrak CONTENTS END Page 22 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Interconnectedness of International Capital Flows and Financial Crises all-encompassing process of capital flows liberalization caused an immense increase in international capital mobility, which was accompanied by more frequent financial crises interconnectedness of international capital flows and financial crises is characteristic for both industrialized countries and less developed countries International Finance © Mojmir Mrak CONTENTS END Page 23 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Definition of Financial Crises and Classifications of Financial Crises characteristic elements of financial crisis: many economic disequilibria usually triggered by a sudden loss of confidence into home currency and/or domestic banking system, and accelerated by, for example, terminated access to foreign financial sources usually involves big falls in the value of wealth and bankruptcies of numerous business subjects financial crisis: yes or no? size of corrections ability of the economic policy to make corrections “softly” financial system robustness International Finance © Mojmir Mrak CONTENTS END Page 24 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS Definition of Financial Crises and Classifications of Financial Crises classification of financial crises: currency crisis banking crisis debt crisis financial crisis general problematics of crises in less developed countries in the last two decades International Finance © Mojmir Mrak CONTENTS END Page 25 ... of International Capital Flows International Capital Flows Until the End of 1980s International Capital Flows in the 1990s International Capital Flows and Financial Crises purpose: define international. .. ECONOMICS International Capital Flows and Financial Crises Variety of Consequences of International Capital Inflows for Capital Importing Countries potential benefits of international capital flows: ... quick fall international capital flows consisted of private flows exclusively sudden drop in international capital flows occurred because of sudden political and/or economic events International