The fall in capital flows was consistent with a worldwide reduction in the leverage maintained by financial institutions and investors, and reduced appetite for the risk often associated with such investments.
What made things worse is that private capital inflows surged to all regions (Latin America, Emerging Asia, and Emerging Europe) in 2007, before contracting sharply to all regions in 2008 and, most likely, in 2009. See chart below.
(Source: The Institute for International Finance)
The shortage of capital is particularly acute for companies that soon need to refinance debt. The IIF estimates emerging market institutions will need to refinance about $20bn a month in the first half of 2009, but that the current supply of credit covers only half that.
At the same time, the global economy is going through an unprecedented, large, rapid, synchronous, collapse in global trade.
Figure 5 captures these trends. It shows the median percent deviation from the trend of monthly, seasonally adjusted, nominal exports (in U.S. dollars) for a sample of 23 large economies. Before August of last year, this series moved in a contained range, with 90% of all observations falling in the range of -6.7% to 6.6%. But since August, this series has moved well below its historical range. The figure for November (for which we have complete data) is -21%, and it is -29% for the partial December data. This suggests that the large and widespread collapse in global trade we have seen in recent months has few parallels.
(Source: Citigroup)
The collapse of the Twin Towers - International Trades and Finances, may actually reflect the fact that the growth in emerging market is contracting at a faster pace than most people assumed, and the unprecedented pace of the decline in production and finances around the world at the end of last year implies a very sharp decline in income and a deterioating trading conditions for emerging market countries.
Posts
