TECHNOLOGICAL innovations and faster information flows, aided by a sharp increase in total savings being channeled into financial instruments across borders, have fostered the dramatic globalization of capital flows—defined as the flow of capital across borders. These flows—including debt, portfolio equity, and direct investment-based financing—topped $6 trillion in 2005.
Developed European countries have provided large amounts of finance to emerging European countries that are newcomers to the European Union.
Europe, the leader of the pack, has enjoyed rapid growth in intra-European flows, fueled by the adoption of the euro as the common currency.
Countries have been shifting toward issuance of local currency debt, reflecting better fundamentals, greater foreign investor appetite, and a growing domestic institutional investor base. A favorable global environment has allowed them to lock in longer-term funding and improve debt structures.
Emerging market countries, though still a small share of overall capital flows, have seen their share grow significantly, thanks to the large current account surpluses of Asia and, more recently, of oil exporters.
Global imbalances have risen in recent years, with a growing current account deficit in the United States and surpluses elsewhere. The attractiveness of U.S. financial markets has supported inflows (including from emerging markets) that financed the current account deficit.
Capital flows from emerging market countries to mature markets have been dominated by central bank reserves and sovereign wealth funds, mainly from emerging Asia and oil exporters.
Despite high current account deficits and strong capital inflows, U.S. net foreign liabilities have remained stable in recent years as U.S. foreign assets have appreciated with a weaker dollar and strong stock markets abroad. But, with continued high current account deficits, they are likely to rise sharply.
Prepared by Mangal Goswami and Jack Ree of the IMF’s Monetary and Capital Markets Department and Ina Kota of the IMF’s External Relations Department.