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Portfolio investment flows to emerging markets

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  • Gooptu, Sudarshan
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    Abstract

    The 1990s brought developing countries the heaviest private capital flows since the early 1980s, says the author - mainly bond and equity financing, rather than medium- and long-term lending by commercial banks. Flows were mainly to Asia in the first half and Latin America in the second half. Market participants believe that most inflows of portfolio investment (especially in Latin America) reflected the return of flight capital by domestic residents with overseas holdings. This and possible herding by foreign investors in a few countries, such as Mexico, could at the margin make securities prices volatile in the emerging markets and cause rapid switching of portfolios between markets (between developed and emerging markets and between emerging markets). This could make macroeconomic management difficult for policymakers. Some contend that if external portfolio investment flows into an emerging market are the result of external factors - such as the U.S. recession and low international interest rates - the increased demand for shares in a relatively liquid emerging stock market may overheat the stock markets and lead to an appreciation of the real exchange rates in these countries. Any attempt to counteract this appreciation of the domestic currency by the monetary authorities, by devaluing the nominal exchange rate, will increase international reserves and perhaps be inflationary. If, on the other hand, policymakers dilute the effect of the real appreciation by sterilizing incoming resources through open market operations, this could increase domestic debt and possibly domestic interest rates. This might attract further inflows from abroad and create a vicious cycle of expected devaluations - which could further appreciate the domestic currency. What is crucial is the policymakers'perception of whether the inflows are temporary. That is why it is important to know the source of portfolio inflows. If the inflows are coming from investors with long-term capital appreciation motives, such as the large institutional investors, and the developing country remains on a path of sustained market-oriented reform aimed at long-run growth, these inflows should continue and even grow in the near future. As more comprehensive data become available, it is important to determine whether these inflows from abroad are intended to be short-term or long-term. The author provides a comprehensive database of transaction-level information on different types of instruments and a glossary of portfolio investment terms.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1117.

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    Date of creation: 31 Mar 1993
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    Handle: RePEc:wbk:wbrwps:1117

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    Keywords: Economic Theory&Research; Financial Intermediation; Banks&Banking Reform; International Terrorism&Counterterrorism; Environmental Economics&Policies;

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    1. Claessens, Stijn, 1993. "Alternative Forms of External Finance: A Survey," World Bank Research Observer, World Bank Group, vol. 8(1), pages 91-117, January.
    2. Mohamed A. El-Erian, 1991. "Mexico's External Debt and the Return to Voluntary Capital Market Financing," IMF Working Papers 91/83, International Monetary Fund.
    3. Peter A. Abken, 1991. "Globalization of stock, futures, and options markets," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-22.
    4. Pfeffermann, G.P. & Madarassy, A., 1992. "Trend in Private Investment in Developing Countries," Papers 14, World Bank - International Finance Corporation.
    5. Ul Haque, Nadeem & Montiel, Peter J., 1990. "How mobile is capital in developing countries?," Economics Letters, Elsevier, vol. 33(4), pages 359-362, August.
    6. Bark, Hee-Kyung K., 1991. "Risk, return, and equilibrium in the emerging markets: Evidence from the Korean stock market," Journal of Economics and Business, Elsevier, vol. 43(4), pages 353-362, November.
    7. Pfeffermann, G.P. & Madarassy, A., 1992. "Trends in Private Investment in Developing Countries," Papers 16, World Bank - International Finance Corporation.
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    Cited by:
    1. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc.
    2. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
    3. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany.
    4. Leonardo Leiderman & Guillermo A. Calvo & Carmen Reinhart, 1994. "Entradas de capitales a países en desarrollo en los años 90: causas y efectos," Research Department Publications 4003, Inter-American Development Bank, Research Department.
    5. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc.
    6. Chuhan, Punam & DEC, 1994. "Are institutional investors an important source of portfolio investment in emerging markets?," Policy Research Working Paper Series 1243, The World Bank.
    7. Jean-François L'Her & Jean-Marc Suret, 1997. "Liberalization, Political Risk and Stock Market Returns in Emerging Markets," CIRANO Working Papers 97s-15, CIRANO.
    8. Carmen Reinhart & Mohsin S. Khan, 1995. "Capital Flows in the APEC Region," IMF Occasional Papers 122, International Monetary Fund.
    9. Kuhan Harichandra & S. M. Thangavelu, 2004. "Institutional Investors, Financial Sector Development And Economic Growth in OECD Countries," Departmental Working Papers wp0405, National University of Singapore, Department of Economics.
    10. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1996. "Inflows of capital to developing countries in the 1990s," MPRA Paper 13707, University Library of Munich, Germany.
    11. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "Inflows of Capital to Developing Countries in the 1990s: Causes and Effects," IDB Publications 5718, Inter-American Development Bank.
    12. Angelos A. Antzoulatos, 1997. "On the determinants and resilience of bond flows to LDCs, 1990-1995: evidence from Argentina, Brazil and Mexico," Research Paper 9703, Federal Reserve Bank of New York.
    13. Jokung N., Octave, 1998. "Timing of investments in emerging markets: the case of Malaysia and Singapore," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 199-210, September.
    14. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized Portfolio Capital Inflows in Emerging Capital Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," NBER Working Papers 5156, National Bureau of Economic Research, Inc.
    15. Sader, Frank, 1993. "Privatization and foreign investment in the developing world, 1988-92," Policy Research Working Paper Series 1202, The World Bank.

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