responded to the extreme conditions of the last few years by
moving money in and out of emerging markets, driven alternately
by greed and fear.
potentially destabilizing bubbles as investors used cheap
dollars to make short-term investments, the authorities in
countries such as Brazil, Colombia, Philippines and more
recently Uruguay have imposed some form of controls to limit
inflows of hot money speculative funds
looking for the best return possible.
At the same
time, measures to limit outflows of foreign money are on the
agenda in Europe as authorities grapple with the prospect of
Greece and possibly other countries leaving the euro.
year, Erik Berglöf, chief economist at the European Bank
for Reconstruction and Development, said developing European
Union countries might need to resort to capital controls if
Greece leaves the single currency.
towards imposing capital controls, both among policymakers but
also on the part of international financial institutions, is
slowly becoming more permissive.
It used to
be that capital controls were automatically anathema to the
IMF, Amando Tetangco, governor of the Philippines central
bank, tells Emerging Markets. Recently there has
been some openness to the imposition of capital controls
provided that they are well targeted, they are time-limited and
they are resorted to as a last resort.
has had to deal with inflows of capital over the past year as
investors are looking for higher yield and, although it has
stopped short of imposing traditional controls, it has had to
introduce some measures to limit the flow of hot money.
has changed to a certain extent in terms of its view,
Go back just
over a decade before the current crisis and the picture
couldnt have been more different. In 1997 and 1998,
Malaysia imposed dramatic controls on investors in a bid to
halt speculation against the ringgit during the Asian financial
minister, Mahathir Mohamad, labelled George Soros a
moron, and the legendary investor responded that
Mahathir was a menace to his own country.
Notwithstanding Malaysias strong recovery from the
crisis, its actions reinforced the stigma that had become
attached to capital controls, which had fallen out of favour as
sentiment turned against the post-war Bretton Woods
financial crisis has led to a reassessment of the role of
In early 2010
the IMF surprised markets with a report that accepted capital
controls as a legitimate means for countries to
temper surging portfolio investments. The IMF has since issued
further thinking on the subject and is expected to come up with
a set of guidelines at its meeting this month.
We see a
role for capital controls, but it is a quite well-defined, very
narrow role. We do think capital controls are useful in the
right circumstances, but we dont think theyre a
substitute for taking more fundamental measures that may be
needed, Tamim Bayoumi, deputy director in the IMFs
Strategy, Policy and Review Department to Emerging Markets
tells Emerging Markets.
partial conversion followed a period of turbulence for emerging
market economies that was not of their own making.
collapse of Lehman Brothers in October 2008, investors pulled
out funds from emerging markets that had surged earlier in the
decade. But when developed nations slashed interest rates to
bolster their economies, flows returned to emerging markets in
search of better returns.
This carry trade
forced up currencies in countries such as Brazil, which
responded by imposing a tax on foreign purchases of Brazilian
securities and later imposing reserve requirements and taxes on
firms shorting the currency.
Hot money also
sought returns in Asia. In the Philippines in the second half
of 2010 and in 2011 the central bank noticed a significant rise
in the volume of non-deliverable forward transactions (NDFs)
derivative instruments that allow foreigners to
participate in the peso market, created mainly to help
companies to hedge their currency exposure.
complicated monetary policy as it added to the inflows of
capital and increased the risk of banks with exposure to the
NDFs, and the risk of the banking system as a whole, Tetangco
said, OK, were not going to close the NDF window, but
since there are risks associated with this instrument, you have
to set aside more capital. We increased the capital charge for
NDF positions by banks. This has led to a reduction in the
volume of NDFs.
were also taking advantage of the positive interest rate
difference between the Philippines and western economies by
depositing money in the central banks special deposit
account facility, which was created to give banks a place to
park their excess liquidity.
So we said
the placements in the SDA facility coming from offshore funds
would not be allowed. These are not foreign exchange controls;
we used macro-prudential measures to address the problems that
we encountered, Tetangco says.
global head of emerging markets research at HSBC, says:
Policymakers in emerging markets have been trying to put
a wedge between domestic monetary conditions and external
monetary conditions. Quantitative tightening is the other side
of quantitative easing. If you are doing quantitative easing
you cant protest too much if someone else is doing
professor of economics at Johns Hopkins University, says the
debate on capital controls opened up because this time the
crisis started in the West.
more acceptable to talk about controls in a market economy, but
not because we had more capital flow volume or new
2008. The global financial crisis for emerging market economies
wasnt very different from other booms and busts; the
crisis hit the centre and made it more acceptable to put
forward the idea that it was not good to have more and more
controls proponents stress that the measures taken by
emerging markets in recent years have been the opposite of
those that gave controls their stigma.
people think of capital controls they think of Malaysia in 1998
seizing existing assets so they cant get out, but the new
consensus is about trying to be more innovative to prevent the
bubbles that can arise through inflows of capital, says
Kevin Gallagher, head of Boston Universitys Pardee Task
Force on Regulating Global Capital Flows for Development.
are being rebranded to fit their new more respectable
to them as capital account regulation while the IMF
uses capital flow management measures for its
preferred actions. Gallagher says the change of language
reflects the new purpose of capital controls in a world where
the consensus is now that finance went unchecked for too
regulations underwent a whole rethink, he says, with everything
regulated apart from the cross-border component of capital
flows, which is referred to as controls, and the
recommendations are to deal with the short-term capital flows
not with the direct investment, he adds.
are trying to do with capital account regulation is to increase
the maturity of the inflows, Gallagher says.
Away from the
booming markets of Asia and Latin America, the turmoil has
raised the prospect of using capital controls to deal with
fiscal crises in Europe. When the IMF intervened in
Icelands financial collapse in 2009, it directed the
country to impose capital controls and even sent in experts to
help the embattled island nation draw them up.
consultancy Capital Economics has argued that controls would be
needed if Greece left the euro in a measure that would be
closer to the old idea of capital controls that of
preventing a flight of assets than efforts to deter hot
IMFs conversion is only partial, and for some its stance
remains a missed opportunity. The IMF accepted capital controls
as a measure to be used in the short term after more
conventional actions such as allowing the currency to
appreciate, accumulating more reserves and altering fiscal and
There are IMF staffers who dont think these
regulations should exist, and that is reflected in the
IMFs more timid approach.
The IMF remains
fearful of the unintended consequences
controls, including knock-on effects to other countries as
investors seek out alternatives when controls are erected.
Jonathan Ostry, who leads the IMFs work on capital
controls, has warned that such measures can distort investment
flows and lead to a beggar-thy-neighbour situation,
in which countries trying to fend off the effects of capital
inflows or outflows hurt other economies in the region, forcing
them to take defensive measures in their turn.
There is also
the question of whether controls are effective in overcoming
the ingenuity of portfolio investors while encouraging
Capital Economics chief emerging markets economist,
doubts that this is the case. If you look at Brazil, it
did seem to lead to a short-term tapering off of more
speculative flows, but there has been lots of speculation as to
whether flows have been rebadged as foreign direct investment
going through various subsidiaries.
chief economist at Standard Chartered, says: The reality
is it is difficult to find controls that differentiate easily
between hot money and longer-term flows, and countries that
have adopted capital controls have in the past been penalized
by international investors.
Jeanne says the
IMFs shift of position is welcome but that its restraint
in embracing capital controls means the fund is missing the
chance to come up with rules on the measures countries can
reluctant to give the IMF more power to oversee capital
controls because the IMFs enthusiasm is not very strong
and it is reversible. The next managing director could decide
not to endorse controls, he says.
are saying is that the international community, for example the
IMF, could use increased acceptance of the right kind of
capital controls to define by exclusion capital controls that
are harmful and should be discouraged.
He accepts that
China, with its huge reserves and managed currency, would be
unwilling to take part but argues that countries with
relatively open capital accounts would be willing to do so.
Such a change would take away the false distinction between the
strictly regulated trade in goods and permissiveness on capital
Goldberg at HSBC
argues that the IMFs change of tack simply acknowledged
the world as it had become. His occasional research called
capital controls radar totted up about 80 controls
and macro-prudential measures adopted in emerging markets in
the two and a half years to June 2010. He has not published an
update since that time because the market has been quieter, but
he argues the long-run trend is here to stay.
structural phenomenon is these are now considered viable
alternatives in the context of the extraordinary reaction in
developed markets. Controls are not seen as taboo any more and
in some cases are seen as a natural response to new
developments in the international arena.
Even as the
stigma attached to capital controls reduces, the inflows that
trigger their use are likely to keep increasing as investors
seek better returns in a low-interest world.
financial flows from west to east are likely in the coming
years, partly because growth prospects will be better and
partly because institutional investors are under-invested in
the developing world, according to Lyons.
dilemma is that emerging economies generally dont have
the ability to absorb easily the likely future inflows,
If it were
possible to use a version of capital controls to deter hot
money while leaving them open to more positive FDI flows, they
would probably do so. Its not a case of saying what
countries should automatically do.
We need to
move towards more open markets, but I dont think people
can be oblivious to the challenges [facing emerging markets]
especially when we have to search for yield and interest rates
are so low.
emerging markets are divided over the use of capital controls,
but many still prefer that markets work relatively freely. In
the Philippines, the central bank does not intervene in foreign
exchange markets unless it wants to prevent sudden moves
in the exchange rate that would destabilize the economy.
what we have so far done and what we continue to believe is
that we should allow market forces to work, Tetangco
When it comes to
capital controls, the facts have changed, and the IMF has
slowly been changing its mind. It remains to be seen whether
its moderate conversion will be able to keep pace with