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
World economy strongest for 30 years
World: GDP and trade % year 16 14 12 World GDP at PPP exchange rates World trade Forecast 10 8 6 4 2 0-2 -4 World GDP at market exchange rates 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: Oxford Economics
World GDP Growth and Inflation 12 10 % year CPI for developed countries (OECD) F'cast 8 6 Emerging markets GDP growth 4 2 World GDP at 2000 weights 0 1981 1985 1989 1993 1997 2001 2005 2009 Source: Oxford Economics
Keeping oil prices high
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
Global flows: trade and capital US$trn 1970 1980 1990 2000 2010e Goods 0.4 1.9 3.4 6.3 16.5 Trade (exports) Total almost Capital zero 0.1 0.5 4 10+ inflows (sources: IMF, UNCTAD,OE)
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 $150-250bn 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 $1trillion
Global current account balances 2006 US Australia Canada UK Old Europe Japan New Asia OPEC ROW Anglosphere Non-Anglosphere World discrepancy Eurozone Norway Switzerland Denmark US, Australia, Canada, UK -1000-750 -500-250 0 250 500 750 1000 Source: Oxford Economics ($bn)
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 20-30 years ago
World financial wealth is growing (US$tr) 180 160 140 120 100 TOTAL WORLD WEALTH 180 160 140 120 100 80 60 NON-US 80 60 40 TOTAL US 20 1995 1997 1999 2001 2003 2005 40 20
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$500-550bn Oil producers account for about US$600bn Emergers external surpluses have been invested largely through the official rather than the private sector
Emerging markets: FDI inflows and outflows US$ bn 320 280 240 200 Inflows % of GDP (RHS) Inflows US$ bn (LHS) % of GDP 4.0 3.5 3.0 2.5 160 2.0 120 1.5 80 40 Outflows US$ bn (LHS) 1.0 0.5 0 1994 1996 1998 2000 2002 2004 2006 Source: Oxford Economics / Haver Analytics 0.0
Emerging markets: FDI inflows US$ bn 140 120 Asia 100 80 60 40 Latin America Central & eastern Europe 20 Other (inc. Turkey) 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Oxford Economics / Haver Analytics
Outflows of FDI by region (% of global total) 1978-80 1988-90 1998-2000 2003-2005 Developed economies 97 93 90 85 Africa 1 0.4 0.2 0.2 Latin America and the Caribbean 1.1 1 4.1 3.5 Asia and Oceania 0.9 5.6 5.1 8.6 South-East Europe and CIS 0.01 0.2 1.8 Source: UNCTAD, authors calculations
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
Official reserves holdings $bn 1200 1050 Emerging Asia ex China 900 750 600 China 450 300 Japan OPEC 150 Russia 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Oxford Economics / Haver Analytics
Growing Government Investment Funds Country Total UAE Singapore Norway China Russia Singapore Kuwait Australia Fund name ADIA GIC Gov Pension Fund - Global State FX Invest Corp + Hueijing Co Stabilization Fund Temasek Holdings Kuwait Investment Authority Australia Future Fund US$ million 2,279,866 875,000 330,000 300,000 300,000 100,000 100,000 70,000 40,000 Source: Morgan Stanley
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
Net flow of funds through the international banking system 1990-97 1998-2006 Source: BIS
World financial wealth $171tr: end 2006 (est)
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
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