Currency woes and capital flows in emerging markets - View on Devaluation

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Thursday, February 04, 2016 6.24 PM / By Temitope Oshikoya **

We have heard countless of time that capital inflows are just waiting in the wings to pour back in if only Nigeria would devalue its currency. Recent evidence from emerging markets suggests that they should go and tell that to the marines!

We note here that in contrast to perceived wisdom there is no guarantee that capital inflows would surge into the country following further massive depreciations.

The first chart below on Crash-Prone is taken from a Project Syndicate article on The Return of the Currency Crash by Carmen Reinhart, a Harvard Economics Professor.

The article has noted thatThe average cumulative depreciation versus the US dollar has been almost 35% from January 2014 to January 2016 for more than 75 countries. For many emerging markets, where depreciations have been considerably greater, weakening exchange rates have aggravated current problems associated with rising foreign-currency debts. But, thus far, there is little to suggest that the depreciations have had much of a salutary effect on economic growth, which for the most part has remained sluggish.”




Yet in spite of those depreciations, The Institute of International Finance (IIF), an association of international bankers, recently released estimates of massive net capital outflows of $735 billion from emerging markets in 2015 on top of more than $111 billion in outflows registered in 2014. 

As illustrated in the second Chart from Quartz based on the IIF estimates, “money poured into the emerging markets over the last three decades. Now, like a nasty riptide, it’s pulling out.”
 


 

Nigeria is not immune to the capital outflows sneeze that has affected Russia, Brazil, and China and weakened the Yuan, ruble, and Brazilian real.

All the capital outflows are simply looking for safety, and recent history of global capital flows suggests that the U.S. Government treasuries and bonds are perceived to provide the greatest safety in periods of uncertainty.

Dr. Temitope Oshikoya, an economist and a chartered banker, is CEO of Nextnomics Advisory.


Related Contributions from Dr. Temitope Oshikoya

1.       The 2016 Budget, Nominal and Real Oil Prices – Jan 05, 2016

2.      Nigeria: Of Ministers, Clowns, Hazards, and Lazards – Oct 21, 2015

3.      Current State Analysis of the Economy - Temitope Oshikoya, at the NESG – Oct 16, 2015

4.      Perfect Storm, Time to Ease up – Sept 17, 2015

5.      JP Morgan index and collective self-delusion – Sept 15, 2015

6.      P Morgan index and collective self-delusion –Sept 16, 2015

7.      The Economist and the Central Bank - In Plain English – July 13, 2015

8.     The Quadrilemma of Buharinomics – June 03, 2015 

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