Capital flows below pre-crisis levels

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Macroeconomic overview

Private capital has continued to flow into the transition region, but at modest rates. Emerging markets globally received significant inflows in the second half of 2012 and the first quarter of 2013, as low interest rates in advanced economies prompted investors to seek higher yields elsewhere. However, with the exception of Turkey, these inflows largely bypassed emerging Europe and Central Asia (see Chart M.8). The level of net flows into CEB and SEE countries – mainly FDI flows – was only about one-third of the levels seen prior to the crisis of 2008-09. Croatia, Hungary, Slovak Republic and Slovenia all experienced net outflows in the second half of 2012 and the first quarter of 2013. In Russia outflows slowed during the second half of 2012, but picked up again in early 2013, coinciding with the slow-down in the economy and the Cypriot banking crisis.¹

Chart M.8 shows that net capital flows to the SEMED region remain very low. In part, this is a reflection of developments in Egypt, where the ongoing political crisis has prompted net outflows for that country. However, weak investor confidence has also affected foreign investment across the SEMED region, as FDI remained stagnant in all countries apart from Morocco.

In May and June of 2013, concerns over the eventual tapering of quantitative easing in the United States sparked a period of heightened volatility in financial markets. Emerging markets in particular were hit by falling equity prices, rising yields and capital outflows.² Markets have since calmed, but future US monetary policy will remain an important determinant of capital flows for emerging economies. The transition region may be less exposed to these developments, due to the lack of more volatile non-FDI inflows in recent years. Turkey, however, is vulnerable to a reversal, given that portfolio inflows financed 85 per cent of its current account deficit in 2012.

1. The exceptionally large outflows and inflows of FDI for Russia in the first quarter of 2013 reflect transactions related to Rosneft’s takeover of TNK-BP. From the perspective of the balance of payments, these transactions broadly offset each other and are unlikely to have significantly affected net capital flows. [back]
2. As measured by EPFR Global fund flows (www.epfr.com). [back]

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