Important Consequences Due To The Prevailing Trends In International Capital Markets

Volatility

One of the main consequences of the intersection of these three trends has been periods of extreme turbulence in international capital flows, followed by periods of relative tranquility. This volatility is evident both in the flows themselves and in the prices (or spreads) at which they are transacted. Interestingly, volatility is concentrated in portfolio flows, both bond and equity, and is much less evident in more traditional forms of capital flows such as foreign direct investment and syndicated credit; although in the case of foreign direct investment, there is an important cyclical element connected to the growth cycle in mature economies The market for emerging market dollar bonds has been a particularly unstable component of international portfolio capital flows, and has been characterized by repeated periods when access by emerging market borrowers has been effectively closed, followed by periods of robust issuance. Indeed, the on-off nature of access by emerging markets appears to have become a key characteristic of international financial markets.

Emphasis on the supply of capital

In seeking to explain the rise in volatility, it is necessary to discuss about the increase in gross capital flows relative to net flows. Capital flows have traditionally focused on the  demand side‘ of emerging market financing by examining current account balances, which are equal to the net external financing needs of countries, and then seeking to identify ways in which these financing needs could be met and on what terms. However, this approach ignores trends in capital flows into and out of the major advanced economies, which are the source of most cross-border capital and the main reason why gross flows have risen so dramatically relative to net flows. These flows are typically in a securitized form and, as such, are susceptible to trading in active secondary markets. Thus, they have become an alternative source of funds, with a more stable investor base that appears to be well worth the time and effort of emerging market countries to cultivate.