Big funding gaps and not enough FDI threaten emerging markets

Friday, 2 August 2013 03:45 -     - {{hitsCtrl.values.hits}}

Reuters: Big balance of payment deficits and low levels of bricks-and-mortar direct investment make South Africa, Turkey, Ukraine and India the developing countries most vulnerable to a “sudden stop” in foreign capital flows. South Africa’s current account deficit even after including Foreign Direct Investment (FDI) receipts amounts to 6.2% of Gross Domestic Product, the largest gap among big emerging economies. South Africa’s deficit, excluding FDI, is almost the same at 6.5% of GDP, indicating almost total reliance on volatile stock and bond investments. Its situation illustrates how many emerging markets have come to rely on such portfolio investments to plug their funding deficits as opposed to more stable FDI flows which are longer-term focused and generate jobs and tax receipts. But global FDI flows have been on the decline since the 2008 credit crisis, with recent United Nations data showing flows fell 18% last year to levels not seen since before 2008. Turkey’s deficit amounts to 4.9% of GDP including FDI and totals 5.9% without it, followed by Ukraine with 4.7% and India with a 3.8% gap. Unsurprisingly, such countries have also seen sharp currency sell-offs as investors fret about the risk of balance of payments crises should external funding dry up. The Indian rupee is down 9% against the dollar this year, the lira has fallen more than 8% while the South African rand has shed 15%. Best-placed deficit countries have a relatively high level of FDI coverage. Brazil and Chile for instance have total funding gaps of 3 and 4% of GDP respectively but FDI covers the lion’s share of this.