US is partly to blame for EM capital controls, says ACPI

Advanced economies have complained loudly about emerging market capital controls.

But some of the responsibility for the limiting of foreign inflows into developing nations’ capital markets – ranging from equities to bonds and currencies – lies with the world’s richest nations, says Alia Yousuf, head of emerging markets at London boutique ACPI.

This is because much of the liquidity being produced by the leading economies – and in particular by the US – is flowing to the developing world, and commodities, Yousuf says.

And authorities there, fearful of overheating, are stemming the tide.

“As long as monetary stimulus in developed markets continues, unfortunately EM countries will have to take unorthodox measures or capital controls,” Yousuf says.

“There are too many cheap US dollars in the world, and when the Federal Reserve expands its balance sheet in the way it has done recently, that money is all going into risky assets like EMs and commodities. It is all a reaction to the stimulus in the US.”

Yousuf adds some countries may impose fewer overt controls, but their central banks may be forced into other ‘unorthodox measures’ to control currencies and bonds.

She says knowing a central bank is prepared to do this “gives investors faith the government will be there if investors leave”, but she monitors the amount of cash at the disposal of such central banks.

In September the South Korean Central bank spent about $4bn in just one morning in capital markets. In countries such as Brazil and South Korea, the authorities have deep pockets.

“Countries with fewer resources cannot defend so aggressively, and people may take advantage of that, for example Turkey.”

Overall, though Yousuf says with or without capital controls, she would prefer investing in developing than developed markets presently.

“When you look at what is going on in the developed world, EMs are in a much better position. Would you want to buy 10-year Treasuries at 1.7%?”


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