Emerging countries facing massive cash outflow : Reality against the Theory !
Emerging countries are experiencing some turbulences in theirs capital transfers ! Once a popular destination for foreign direct investment , these countries are becoming places to avoid. Why did they get into that mess? To understand the cause of the excessive outflow of capital from emerging countries, it is necessary to analyze the factors that determine the massive inflow of capital in these countries!
Capital flows depend on the theory of three factors
1. The difference in economic growth : economic growth is the primary factor to open investors and speculators eyes! In almost 100% of cases, all countries that have experienced massive capital inflows first attracted attention with their impressive economic growth rates . China, India and Mozambique are examples among many others .
2. The difference between domestic interest rates and the overall interest rate ( often dictated by the interest rate of the U.S. central bank -FED ) . When rates the Fed are very low, speculators prefer to allocate their funds to regions or rates are high.
The appetite for financial risk. It is directly linked to the differential in interest rates .
image. There is an inverse relationship between market volatility index (VIX) and capital inflows to emerging countries . The more financial markets in advanced economies are unstable, the more emerging countries will experience a strong capital inflows.
3. Capital control policy. A control of capital inflow capital tends to discourage speculators.
From these four points, the outflow of capital would take place due to:
a. Weak economic growth in emerging countries ! is it proven?
b. A reduction in the anticipated differential in interest rates ( Dti *) . The Fed plans to raise interest rates (fed (i ) *) , this will reduce the differential in interest rates .
Dti * = em (i ) -fed (i ) * system em( i) = interest rate in emerging countries .
A reduction in the differential will be followed by an outflow of capital from emerging countries. Is it proven?
Control sources of rigidity capital transfers capital is also the cause of the excessive outflow ! Is it proven?