Crude Oil Prices, Capital Flows, and Emerging Economies

Since 2000, the crude oil price has been repeating ups and downs, generating a significant impact not only on oil-producing countries but also on the global economy. This study identifies domestic and external factors that affect international capital flows by analyzing how changes in the crude oil price have affected international capital flows in emerging countries that are net exporters of crude oil and those that are net importers. A rise in the crude oil price raises the value of net exporters’ exports, improving their international balance of payments, while it works against net importers’ balance of payments through an increase in the value of imports. When the crude oil price is rising, countries with a current account surplus due to a large net export of crude oil are assumed to experience an increase in capital outflows, while net importers are assumed to see an increase in capital inflows in line with the deterioration of their current account balance. However, when we look at changes in the balance of external debts in oil price-rising and -falling phases in net importers and exporters, we see an uptrend in the balance of debts in price-rising phases and a downtrend in price-falling phases with respect to both net importers and exporters. In oil price-rising phases, net importers’ international balance of payments deteriorates significantly, a situation that tends to lead to an increase in inflows of foreign capital. On the other hand, net exporters are supposed to experience an increase in capital outflows in line with an expansion of their surplus. However, extra profits from crude oil sales due to price rises bring additional budget revenue, albeit temporarily, and tend to strengthen pressure for fiscal expenditure, and this is considered to cause an increase in capital inflows by promoting economic growth and an associated interest rate rise. Changes in the crude oil price are correlated with global economic conditions and U.S. interest rates. Therefore, we conducted a panel analysis using changes in the balance of external debts and the current account balance as explained variables in order to identify factors of international capital flows. As a result, we found that in addition to the crude oil price, the U.S. economic growth rate and the budget balance are statistically significant variables, while the U.S. interest rate is not. When we looked at crude oil net importers and ex- porters individually, it was found that there are more significant variables for net exporters than for net importers. Specifically, in addition to the abovementioned three variables, the inflation rate and the domestic economic growth rate are significantly associated with international capital flows in the case of net exporters. Even though the normalization of U.S. monetary policy may have triggered capital outflows in some emerging countries, the crude oil price and the U.S. economic growth rate have had greater effects on international capital flows than the U.S. interest rates. Attention should be paid not only to exogenous variables, such as global economic conditions and the crude oil price, but also to the state of domestic economic fundamentals as a significant factor of international capital flows. When we developed a vulnerability index using three macro factors and examined the relationship between this index and the foreign exchange depreciation rate, it was found that a country’s depreciation rate is correlated with the degree of weakness of its fundamentals. If emerging countries are to avoid capital flight, maintaining the soundness of the domestic economy will be an effective way of doing that.