Home' Trinidad and Tobago Guardian : October 1st 2015 Contents BG20 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 1 • 2015
Moves by Nigeria and
China to clamp down
on currency and
equity markets have
raised fears other
countries may also
seek to curb capital movement as a way to
stem the exodus of money from emerging
Some governments are already restricting
citizens abilityto move cash freely or tight-
ening existing measures and someforeign
investors worry they may be next in line.
As 2015 outflows from emerging stock
and bond funds near US$100 billion and
currencies from Malaysia to Brazil plumb
multi-year lows, memories are stirring of
past controls thatblock unlucky investors
At stake is the US$7 trillion that the Insti-
tute ofInternational Finance reckons has
flowed into emerging markets since 2005,
via direct investments, mergers and acqui-
sitions,and stock and bond purchases. Some
of those with EM exposure mayconsidering
moving before regulators do.
"Malaysia, Brazil, Indonesia all have a
recent history of intervening and imposing
capital controls ... this is very muchcon-
tingent on how much more outflows there
are to come, and how much more depre-
ciation there is to come," said Aidan Yao,
senioremerging Asia economist, Axa Invest-
ment Managers, Asia.
Capital controls are often first levied on
local bank deposits or exporting firms. But
freezing exchange rates orinterbank trading
can leave foreign investors struggling toliq-
uidate assets or withdraw cash from banks.
Having resolved not to devalue its naira,
Nigeria has clamped down on firms dollar
purchases and squeezed interbankcurrency
trading to the maximum; market players
report threeto five deals a day instead of
China has increased checks on firms
currency buying andpassed regulations to
curb "malicious" trade in stock futuresafter
months of equity turmoil and capital out-
Those steps have halted the rout but daily
turnover on theShanghai and Shenzen
exchanges has more than halved since July.
Neither is a typical emerging economy,
however: China restricts free movement of
capital anyway, while Nigeria, likemuch of
Africa, has relatively undeveloped and illiq-
Foreigners faced no trouble repatriating
cash from Nigeria,one former debt holder
Rather than blanket controls, subtler
measures such astaxing short-term invest-
ments at point of exit or limiting residents
ability to send money abroad are seen as
But "soft" curbs too may eventually be
"Capital flight can become a self-fulfilling
prophecy ifinvestors get worried about abil-
ity to transact, and you couldsee more pres-
sure on bonds," said Yacov Arnopolin, a
portfoliomanager at Goldman Sachs Asset
Not an anachronism
The thinking on capital controls has
undergone a shift inrecent years, with the
International Monetary Fund giving atacit
nod during the boom years to moves by
countries such as Brazil to prevent currencies
from rising too much.
Far from being an anachronism, controls
were deployed in recent years in Iceland,
Cyprus and Greece, while small economies
such as Argentina and Ukraine also have
curbs. Some resorted to temporary measures
during the 2008-2009 meltdown.
Such steps can aid crisis management
by reducing panic, advocates say, noting
that Malaysian controls in 1998 freed its-
central bank to loosen policy, helping its
Some even see Nigeria s decision to freeze
currency markets as justified while the new
president tackles corruption.
"Occasionally flows do become very
alarming and erratic, and potentially have
negative repercussions for the economy. So
(theIMF) have changed their stance, and
maybe some countries shouldhave capital
measures against these kind of erratic flows,"
Yaosaid, though he warned countries must
think carefully over thetiming and severity
of the controls.
Calm before storm
Such fears may be overdone. Countries
which benefited from foreign capital will
probably want to keep investors sweet,
many say, especially if they have balance
of payments deficits.
Even the rouble s 58 per cent peak-to-
trough fall last year and the real s 35 per
cent slump in 2015 didn t prompt control-
sthey note, and Malaysia has ruled them
out this time.
Christian Keller, head of economics
research at Barclays, said struggling gov-
ernments will prefer to go to the IMF or
wealthier countries for assistance, while
soft curbs such as taxes are ineffective dur-
ing a market meltdown.
"If everything is going belly-up, you
won t care aboutpaying a tax to exit and
save some of your investment," he added.
The clincher may be the extent of the
selloff, because spiralling inflation and cur-
rency collapse are difficult for voters to
Malaysian stocks and the ringgit are down
about 20 percent this year compared with
an 80 per cent plunge during the 1998
crisis, noted Bank of America Merrill Lynch
But central bank intervention has depleted
reserves by US$25billion this year, while
Malaysia is also deep in politicalcrisis, mean-
ing capital controls can t be ruled out, they
The International Monetary Fund warned on Tuesday
that emerging market firms, which together have
amassed a record $18 trillion of debt, need careful mon-
itoring as the era of record low global interest rates
comes to an end.
In its latest Global Financial Stability report, the fund
said the biggest rises in leverage ---the amount of debt
relative to a firm s equity---had come in "vulnerable
sectors" like construction, mining and oil and gas, and
were increasingly exposed to currency risk.
Regionally, the most striking shifts had been in China
and Latin America where overall corporate leverage
was now at almost 120 per cent and 110 per cent
respectively, and leverage in their construction sectors
close to 275- and 200 per cent.
"The upward trend in recent years naturally raises
concerns because many emerging market financial
crises have been preceded by rapid leverage growth,"
the report said.
The IMF also warned that years of record low rates
had meant that despite weaker balance sheets, emerging
market firms had been able to issue more bonds, and
at better terms.
"If rising leverage and issuance have recently been
predominantly influenced by external factors (low global
rates), then firms are rendered more vulnerable to a
tightening of global financial conditions," the report
"Similarly, a decline in the role of firm- and coun-
try-level factors in recent years would be consistent
with the view that markets may have been underes-
Slumping commodity prices, the threat of rising US
interest rates, exacerbated in some cases by ugly national
politics, have whipped up a near perfect storm for
emerging markets this year. The IMF called for countries
to keep a careful eye on their big firms as the global
backdrop begins to change. More data was needed,
particularly in areas such as how much debt firms had
in currencies other than their own.
Many major emerging market currencies have
dropped between 20-40 per cent against the dollar
over the last year which will make paying back any
unhedged dollar debt far more expensive. Reuters
Countries dependent on exports of commodities
like metals or oil could face long-term growth chal-
lenges from the collapse in prices, the International
Monetary Fund warned Monday.
The IMF said that the broad decline in commodity
prices after the boom of the 2000s is mainly a cyclical
pain for producers, their incomes soaring and now
falling in tandem with prices.
But the IMF said, in its new World Economic Out-
look report, that the price slump could also result in
lower investment in future production in these coun-
tries, limiting their growth potential.
The fund said many exporting countries have been
better prepared for the current slump, saving more
of their earnings in preparation for an industry slow-
down, and letting their currencies adjust to the market,
resulting in less violent swings. They face, on average,
the loss of about 1.0 percentage point of growth annu-
ally over the 2015-2017 period, with oil and gas
exporters hit much harder, the IMF said.
Some domestic spending to support growth could
help, but that impact on broader economic growth
will be limited. Instead, such governments should
focus as much on structural reforms to improve pro-
ductivity in their commodity sectors, including opening
up bottlenecks and improving inefficiencies.
"Policymakers must be realistic about growth poten-
tial in commodity-exporting economies," the IMF
said, warning that this slowdown "could even be
larger than those experienced in past episodes." Reuters
Emerging markets rout stirs
unease about capital curbs
IMF: Watch that
US$18 trillion debt
may have longer term
effect on exporters: IMF
Links Archive September 30th 2015 October 2nd 2015 Navigation Previous Page Next Page