Global financial markets: how emerging market economies are enlarging the playing field

Transcription

1 Global financial markets: how emerging market economies are enlarging the playing field Paola Subacchi and Vanessa Rossi International Economics Programme, Chatham House, London The Gulf region: the new hub of global financial power? Doha, 11 June 2007

2 World economy strongest for 30 years

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4 World: GDP and trade % year World GDP at PPP exchange rates World trade Forecast World GDP at market exchange rates Source: Oxford Economics

5 World GDP Growth and Inflation % year CPI for developed countries (OECD) F'cast 8 6 Emerging markets GDP growth 4 2 World GDP at 2000 weights Source: Oxford Economics

6 Keeping oil prices high

7 Globalisation driving activity Global trade imbalances are one of the key drivers of capital flows Both trade and capital account flows are rising sharply creating an ever greater need for financial market development around the world Asia and the Gulf are at the heart of the new boom

8 Global flows: trade and capital US$trn e Goods Trade (exports) Total almost Capital zero inflows (sources: IMF, UNCTAD,OE)

9 Recent development of capital flows Total global capital inflows rose from under $1trn in 1990 to over $4trn pa by 2000: initial big boost from bilateral flows within the OECD Developing country inflows also rose: up from under $25bn in late 1980s to $ bn pa in 2000 (IMF WEO) Now FDI inflows to emerging markets are over $300bn and outflows are above $100bn Net capital outflows from Asia, Russia and OPEC alone amount to around $1trillion

10 Global current account balances 2006 US Australia Canada UK Old Europe Japan New Asia OPEC ROW Anglosphere Non-Anglosphere World discrepancy Eurozone Norway Switzerland Denmark US, Australia, Canada, UK Source: Oxford Economics ($bn)

11 What capital flows? Capital account transactions are about a third portfolio flows, a third FDI with the rest mostly banking operations and FX management The background to this is the rise in GLOBAL WEALTH and the increase in the proportion of this wealth that each country invests abroad Major change from years ago

12 World financial wealth is growing (US$tr) TOTAL WORLD WEALTH NON-US TOTAL US

13 Emergers outflows over US$1tr pa China and Japan alone will have a current account surplus of some $400bn this year out of an Asia total of around US$ bn Oil producers account for about US$600bn Emergers external surpluses have been invested largely through the official rather than the private sector

14 Emerging markets: FDI inflows and outflows US$ bn Inflows % of GDP (RHS) Inflows US$ bn (LHS) % of GDP Outflows US$ bn (LHS) Source: Oxford Economics / Haver Analytics 0.0

15 Emerging markets: FDI inflows US$ bn Asia Latin America Central & eastern Europe 20 Other (inc. Turkey) Source: Oxford Economics / Haver Analytics

16 Outflows of FDI by region (% of global total) Developed economies Africa Latin America and the Caribbean Asia and Oceania South-East Europe and CIS Source: UNCTAD, authors calculations

17 What drives capital flows? FDI greenfield investment and M&A Matching assets and liabilities or cost base-to-sales - helps explain 2 way flows given international nature of big business Trade finance rising in-line with world trade Foreign exchange reserves management Portfolio flows reflecting ASSET ALLOCATION shifts: risk adjusted return on capital and portfolio diversification theories

18 Official reserves holdings $bn Emerging Asia ex China China Japan OPEC 150 Russia Source: Oxford Economics / Haver Analytics

19 Growing Government Investment Funds Country Total UAE Singapore Norway China Russia Singapore Kuwait Australia Fund name ADIA GIC Gov Pension Fund - Global State FX Invest Corp + Hueijing Co Stabilization Fund Temasek Holdings Kuwait Investment Authority Australia Future Fund US$ million 2,279, , , , , , ,000 70,000 40,000 Source: Morgan Stanley

20 Increase in activity and risk More exposure to risky assets, impact on the USD and on the sovereign bond markets in the US, Eurozone and the UK More equity acquisitions, M&A and FDI, transformation of c/a surplus countries central banks from creditors to owners: risk of financial protectionism and political backlash in countries offering desirable assets? Shift in investment focus from the core G7 markets to the emerging G8-G20 markets Rise of some international financial and banking centres with a global outreach

21 Net flow of funds through the international banking system Source: BIS

22 World financial wealth $171tr: end 2006 (est)

23 Enlarging the global financial playing field Both in and outflows have increased FDI, M&A and portfolio flows are all growing So total market activity is much higher More, and more sophisticated, financial products are required - from insurance and trade finance to IPOs, derivatives, hedge funds These surging flows require markets that are able to process such large volumes and international transactions

24 Thank you