Private Capital Flows, Real Sector Growth and Institutional Quality in Africa

The surge of private capital flows to developing countries that occurred in the 1990s has been the most significant phenomenon of the decade for these countries. By the middle of the decade many developing countries in Asia and Latin America were awash with private foreign capital. In contrast to earlier periods when the scarcity of foreign capital dominated economic policy-making in these countries, the issue now for governments was how to manage the largescale capital inflows to generate higher rates ofinvestrnent and growth. While a number of developing countries were able to benefit substantially from the private foreign financing that globalisation made available to them, it also became apparent that capital inflows were not a complete blessing and could even turn out to be a curse. Indeed, in some countries capital inflows led to rapid monetary expansion, inflationary pressures, real exchange rate appreciation, fmancial sector difficulties, widening current account deficits, and a rapid build-up of foreign debt. In addition, as the experience of Mexico in 1994 and the Asian crisis of 1997-98 demonstrated, financial integration and globalisation can cut both ways. Private capital flows are volatile and eventually there can be a large reversal of capital because of changes in expected asset returns, investor herding behaviour, and contagion effects. Such reversals can lead to recessions and serious problems for financial systems. This paper examines the characteristics, causes and consequences of capital flows to developing countries in the 1990s. It also highlights the appropriate policy responses for governments facing such inflows, specifically to prevent overheating of the economy, and to limit the vulnerability to reversals of capital flows.

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Corporate Governance and Private Capital Flows to Latin America

SSRN Electronic Journal ◽

10.2139/ssrn.1818693 ◽

2003 ◽

Author(s):

Alberto Chong ◽

Alejandro Izquierdo ◽

Alejandro Micco ◽

Ugo G. Panizza

Keyword(s):

Corporate Governance ◽

Latin America ◽

Capital Flows ◽

Private Capital ◽

Private Capital Flows

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Sovereign credit ratings, relative risk ratings and private capital flows: evidence from emerging and frontier markets

Studies in Economics and Finance ◽

10.1108/sef-10-2020-0437 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Supriyo De ◽

Sanket Mohapatra ◽

Dilip Ratha

Keyword(s):

Relative Risk ◽

Capital Flows ◽

Global Financial Crisis ◽

Credit Ratings ◽

Private Capital ◽

Content Type ◽

Sovereign Credit ◽

Sovereign Credit Ratings ◽

Private Capital Flows ◽

The Impact

Purpose Relative risk ratings measure the degree by which a country’s sovereign rating is better or worse than other countries (Basu et al., 2013). However, the literature on the impacts of sovereign ratings on capital flows has not covered the role of relative risk ratings. This paper aims to examine the effect of relative risk ratings on private capital flows to emerging and frontier market economies is filled. In the analysis, the effect of relative risk ratings to that of absolute sovereign ratings in influencing private capital flows are compared. Design/methodology/approach This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies using quarterly data for a 20-year period between 1998 and 2017. A dynamic panel regression model is used to estimate the relationship between ratings and capital flows after controlling for other factors that can influence capital flows such as growth and interest rate differentials and global risk conditions. Findings The analysis finds that while absolute sovereign credit ratings were an important determinant of net capital inflows prior to the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period. The post-crisis effect of relative ratings appears to be driven mostly by portfolio flows. The main results are robust to an alternate measure of capital flows (gross capital flows instead of net capital flows), to the use of fixed gross domestic product weights in calculating relative risk ratings and to the potential endogeneity of absolute and relative ratings. Originality/value This study advances the literature on being the first attempt to understand the impact of relative risk ratings on capital flows and also comparing the impact of absolute sovereign ratings and relative risk ratings on capital flows in the pre- and post-global financial crisis periods. The findings imply that emerging and frontier markets need to pay greater attention to their relative economic performance and not just their sovereign ratings.

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