Capital flows over the past 15 years have proved volatile in the wake of series of challenging global events. The OECD’s Etienne Lepers highlights recent trends in capital flows based on insights from a new OECD dataset that monitors monthly flows.
Capital flows have experienced successive waves since the global financial crisis and their volatility has sometimes brought important challenges for policymakers, calling for timely monitoring of such developments. Detecting volatile movements with quarterly data, released with a time-lag, has proven difficult. Indeed, the speed with which the COVID-19 crisis and the resulting capital flow disturbances unfolded has led researchers to seek higher frequency capital flow data, better suited to analyse capital flow developments in a timely manner.
The OECD’s new capital flow dataset provides data on capital flows beyond portfolio flows for 45 countries at monthly frequency, is publicly available and updated quarterly.[i] The usual quarterly Balance of Payments (BoP) data is typically released with a lag of 2 quarters, which is too late for timely analysis of capital flow developments. Quarterly data may also hide short-lived but potentially destabilising capital flow shocks such as the drop in March 2020 (see Figure 1).
| OECD Monthly Capital Flow dataset This dataset covers all main capital flow categories of the financial account – FDI, portfolio equity, debt and other investment and covering both inflows and outflows. It is aggregated solely from public sources and is consistent with Balance of Payment (BoP) principles Read more |
The dataset demonstrates especially large capital flow movements in recent years associated with the COVID-19 shock, the subsequent rebound, Russia’s war against Ukraine, and the normalisation of monetary policy. While the frequency of sharp increases and decreases in capital flows does not appear to have increased since the Global Financial Crisis, capital – and notably portfolio – flows have still displayed several large waves post-2008 (Figure 1): from the 2013 “taper tantrum” during the previous round of US monetary policy tightening to the 2015 Chinese market stress, the COVID shock and most recently the 2022 emerging market outflows.
Figure 1 – Portfolio inflows to emerging markets since 2010 (bn USD)
Note: dots plot the end of quarter monthly estimated flows from quarterly data.
The COVID-19 crisis led to a dramatic capital flow shock for both emerging economies (EMEs) and advanced economies (AEs), primarily driven by investment fund sell-offs. EMEs experienced a USD 70 bn drop in portfolio inflows in the single month of March 2020. Perhaps more surprisingly, advanced economies and notably the United States, also experienced significant sales of portfolio assets by non-residents during the same month. Unlike during the 2008 crisis, such sales of foreign assets were not bank-led but primarily driven by investment funds, which have become major actors in the financial system since the financial crisis. Investor appetite shifted abruptly, first from risky to safe and more liquid assets, and then, from mid-March, to cash and near-cash short-dated assets, the so-called “dash for cash”, to meet redemptions or raise cash buffers (See CGFS and FSB for summaries). The pandemic also accelerated an already steady decline of global FDI inflows, which hit a 15-year low in 2020.[ii]
The 2020 drop in capital flows was short-lived, cushioned by significant central bank actions in both AEs and EMEs, and followed by a very strong rebound. Portfolio flows to EMEs showed a strong rebound in the second half of 2020, initially led by China, followed by other EMEs. The rebound was faster than during the all previous sudden stops in the post-crisis period (see Figure 1). This is also the case for FDI inflows, which surged 88% in 2021, exceeding pre-pandemic levels.
However, this rebound of portfolio flows was also short-lived, as inflationary pressures following the COVID shock signalled the end of accommodative monetary policy stances. Inflationary pressures increased expectations for the removal of ultra-accommodative monetary policy support, triggering a repricing of sovereign bonds with rising EM and AE sovereign yields. As a result, portfolio inflows to EMEs gradually decelerated from February 2021. In late-August 2021, the US Federal Reserve (Fed) announced its decision to gradually taper its bond purchase programme, which was stopped in March 2022 and followed by several interest rate hikes since.
Figure 2. Monthly capital inflows to advanced economies (AEs) and emerging economies (EMEs) – bn USD
Source: OECD Monthly Capital Flow dataset Note: Maximum sample of 22 AEs for portfolio inflows and 21 for other inflows and 21 EMEs for portfolio flows and 14 EMEs for other inflows. See OECD Monthly Capital Flow dataset for detailed country coverage.
The war in Ukraine has further worsened the already complicated outlook foremerging markets, reflected in substantial outflows in 2022. This is despite limited direct financial exposure to Russia, described in detail in a recent OECD report. Russia has played only a marginal role in global FDI (1-1.5% of global FDI stocks) and international banks had already substantially retrenched from the Russian market after the first wave of sanctions in 2014[iii]. While it is difficult to isolate its specific impact, the war represents a further drag on capital flows to emerging markets, by increasing global uncertainty and by boosting global inflation. This adds to country-specific contexts such as COVID-19 lockdowns in China. The war has also brought back geopolitics as a major factor driving investment decisions, with investors possibly fearing secondary sanctions or geopolitical issues in other EMEs. As a result, EMEs recorded cumulative portfolio outflows of USD 120 bn from February to June 2022, a large share of which was accounted for by China (Figure 3). These outflows were more than the dramatic but shorter-lived outflows of March and April 2020 at the onset of the pandemic.
Figure 3. Cumulative portfolio inflows since February 2022
What will the outlook be like for capital inflows going forward? Research on the drivers of capital flows has systematically identified a number of factors from the monetary policies of advanced economies, commodity prices and global risk aversion to country risk and output growth. At the time of writing, Russia’s war against Ukraine is still affecting energy prices and provoking continued global uncertainty, inflation is at elevated levels in advanced economies, with markets pricing in further Fed rate hikes up to 4% before the end of 2022, and a number of emerging markets are navigating complex political situations. Nonetheless, portfolio flows, like waves, have shown a tendency to converge in the medium run, hinting that a rebound is possible in the coming years, rather than a structural, continuing decline in flows. The OECD Capital Flows Dataset enables us to access timely updates on how these flows will develop.
Learn more about the OECD’s work on capital flows.
[i] The pre-war aggregate exposures of European and US banks to Russia amounted to about 0.8 and 0.4% of their total claims.
[ii] More details on FDI statistics including analysis on most recent FDI trends at quarterly and annual frequency can be found at https://www.oecd.org/investment/statistics.htm.
[iii] Another data collection effort based on public sources is a recently released IMF dataset covering portfolio inflows for 18 EMEs. Private data sources provide data at a better frequency but have limited coverage. Emerging Portfolio Fund Research tracks equity and debt inflows into dedicated investment funds, covers virtually all countries and is available daily, but represent only a fraction of Balance of Payments portfolio flows (estimated at around a quarter) and the reporting method is conceptually different from BoP data. Data from the Institute of International Finance covers portfolio equity and debt flows to 15 EMEs at a weekly frequency, and 35 EMEs at a monthly frequency, but has a limited country and capital flow coverage.
On the level 