IMF Text: Capital Flows Remain Relatively 'High,''Volatile'
First Published Tuesday, 19th April 2011 04:20 am - © 2011 MNI News
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WASHINGTON (MNI) - The following is an excerpt from the presentation by International Monetary Fund staff at the April 15 G20 meeting on 'Global Economic Prospects and Policy Challenges,' published Monday:
After rising rapidly, capital flows to emerging economies have moderated but remain relatively high and volatile.
- In recent months, capital inflows have moderated and even reversed in some cases. This could reflect a confluence of factors, including increasing inflation concerns, with local currency yield curve steepening observed in some key markets, and renewed investor interest in advanced markets after a run of emerging market outperformance that pushed equity and bond valuations to relatively high levels.
- Emerging economies have addressed capital inflows, to varying degrees, with a combination of macroeconomic policies as well as prudential and capital control measures. However, policymakers in a number of emerging economies are relying more on prudential and control measures, while delaying the needed macroeconomic policy response.
Some major Asian economies have continued to accumulate reserves in response to capital flows, while other emerging economies have experienced substantial exchange rate appreciation. Specifically:
- Reserve accumulation in some parts of Asia is contributing to persistent and significant exchange rate misalignments relative to fundamentals, and hampering progress towards global rebalancing. For instance, the Chinese renminbi continues to remain substantially undervalued in real effective terms. Countries in emerging Asia generally compete more directly with China in third markets than Latin American countries, and the fear of being 'priced out' of these markets in Asia is likely providing an incentive to limit appreciation against the Chinese renminbi.
- In contrast, some commodity exporters with floating exchange rates, such as Brazil and South Africa, have seen their currencies appreciate substantially in nominal effective terms since early 2009, boosting real exchange rates to levels that look overvalued from a medium-term perspective. The effect of this real appreciation on external accounts has been offset, in part, by strong gains in commodity prices over the past year that have supported export incomes.
- The real effective values of the euro and the Japanese yen are broadly in line with medium-term fundamentals, while the U.S. dollar remains on the strong side of fundamentals. Some further real effective depreciation of the U.S. dollar against undervalued currencies would help ensure a sustained decline of the U.S. current account deficit towards a level more consistent with medium-term fundamentals, helping to support more balanced growth.
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