Trade and capital flows, the two main channels through which the global crisis was transmitted to the developing countries, have shown widely divergent trends in the most recent period. Numbers till the second quarter of 2009 show that while trade continues to contract, the capital flows have bounced back to top pre-crisis levels. This is a substantial recovery since the total external financing comprising of bonds, equity and loans had dipped by more than one-third from $725 billion in 2007 to $454 billion in 2008.
The recovery was especially strong in India where the flows have surged by more than 300% in the second quarter of 2009, after dipping in the previous two quarters, pushing up its share in total external finance flows to emerging markets from 7.3% in the pre-crisis period to 16.1% in the latest quarter. The buoyancy in capital flows to India not only reaffirms the India growth story but also the greater confidence of the global investors in the Indian market.
So, to capture the real impact of the global crisis on external fund flows to capital markets, it is better to delve into the quarterly figures as the markets were buoyant till the second half of 2008. Quarterly numbers show that financial flows to emerging markets, in fact, dipped sharply by more than half from $113 billion in the third quarter of 2008 to just $50 billion in the fourth.
The immediate impact of the financial turmoil, however, varied across major regions. Emerging markets in Asia, which accounted for more than 40% of the total financial flows to emerging markets, saw the funds decline by 48.3% in the fourth quarter of 2008 to $23.6 billion. Fund flows to emerging markets in Europe, which accounted for one-fifth of the total flows, was equally badly hit with inflows declining by 49.5% to $13.5 billion. The scenario was worse in Africa, which saw inflows declining by close to two-thirds, bringing down fund availability to $782 million, which reduced its share in emerging market flows to less than half the pre-crisis level of 4.2%. But the worst case scenario was in the Middle East and Central Asia, which accounted for around 13.5% of the emerging market flows, and where the inflows dipped by 26.3% in the fourth quarter of 2008 to just $3.1 billion. The least immediate impact was on the emerging markets in Latin America, which accounted for just a little less than one-fifth of the total flows, and saw the external funding go down by 28.6% to $8.5 billion in the fourth quarter.
Recent trends of external fund flows to emerging markets show that the decline in external sector flows in the fourth quarter of 2008 were quickly reversed. Numbers show that total fund flows to emerging markets recovered sharply by 117% in the first quarter of 2009 and further by 15.9% in the second to touch $124.6 billion, which was 11% higher than the pre-crisis levels. But the pace of recovery in external fund flows varied sharply across the regions.
The improvement was most buoyant in regions which have a smaller share of the financial flows. For instance, the numbers for the first two quarters of 2009 show that it picked up by 234% and 23% in Africa to reach $3.2 billion, which was 45% higher than the pre-crisis level. But in the case of the Middle East and Central Asia, despite the buoyant 205% and 39.2% increase in the next two quarters, the $13.3 billion inflows in the second quarter of 2009 was just about half the $26.1 billion inflows in the third quarter of 2008.
But though the pick up in fund flows to the emerging markets in Europe and Latin America were short lived, with revival in flows in the first quarter of 2009 dissipating in the second, the final size of the fund flows in both regions shot above pre-crisis levels. In the case of emerging markets of Europe, the $27.5 billion of inflows in quarter two of 2009 was 3% higher than in the third quarter of 2008, while in case of Latin America the $16.6 billion inflows was 39% higher. The most impressive gains were, however, made by the emerging markets in Asia where the $63.9 billion in the second quarter of 2009 was 40% higher than the pre-crisis levels.
The churn in external sector flows to emerging markets after the global crisis saw India emerge on top by increasing its share of total flows from 7.3% in the third quarter of 2008 to 16.1% in the second quarter of 2009, an increase of 8.8 percentage points. This is a significant gain as India was ranked third after Russia and the United Arab Emirates in the pre-crisis days. The next largest gainer was South Korea whose share in total emerging market external fund flows increased by 6.7 percentage points, pushing up its share from 4% to 10.7% during the period.
The outcome in the remaining Bric countries was mixed. While Brazil and China saw an improvement in their inflows, the share of Russia, which was the most attractive emerging market in the pre-crisis period, declined substantially since then. While the surge in external flows in the recent period saw the share of China go up by 2.9 percentage points above the pre-crisis levels to touch 9.3% of the total emerging markets flows, the inflows to Brazil went up by 2.2 percentage points to touch 9.4% during the period. The list of important emerging market economies, which has lost market share of total external fund flows, include Russia (6 percentage points), Singapore (3.1), Qatar (2.6), Malaysia (2.1), United Arab Emirates (2.5) and Hong Kong (1.9).