Sovereign credit ratings, relative risk ratings and private capital flows: evidence from emerging and frontier markets

Purpose Relative risk ratings measure the degree by which a country’s sovereign rating is better or worse than other countries (Basu et al., 2013). However, the literature on the impacts of sovereign ratings on capital flows has not covered the role of relative risk ratings. This paper aims to examine the effect of relative risk ratings on private capital flows to emerging and frontier market economies is filled. In the analysis, the effect of relative risk ratings to that of absolute sovereign ratings in influencing private capital flows are compared. Design/methodology/approach This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies using quarterly data for a 20-year period between 1998 and 2017. A dynamic panel regression model is used to estimate the relationship between ratings and capital flows after controlling for other factors that can influence capital flows such as growth and interest rate differentials and global risk conditions. Findings The analysis finds that while absolute sovereign credit ratings were an important determinant of net capital inflows prior to the global financial crisis in 2008, the influence of relative risk ratings increased in the post-crisis period. The post-crisis effect of relative ratings appears to be driven mostly by portfolio flows. The main results are robust to an alternate measure of capital flows (gross capital flows instead of net capital flows), to the use of fixed gross domestic product weights in calculating relative risk ratings and to the potential endogeneity of absolute and relative ratings. Originality/value This study advances the literature on being the first attempt to understand the impact of relative risk ratings on capital flows and also comparing the impact of absolute sovereign ratings and relative risk ratings on capital flows in the pre- and post-global financial crisis periods. The findings imply that emerging and frontier markets need to pay greater attention to their relative economic performance and not just their sovereign ratings.

Impact of Interest Rate Differential and Exchange Rate Movement on the Dynamics of Nigeria’s International Private Capital Flows

The study examines the impact of interest rate differential and exchange rate movement on the dynamics of Nigeria’s international private capital flows from 2010Q1 to 2019Q4. It uses the interest rate parity theory and the Markov Switching Time Varying Transition Probability Modelling approach. Findings show that interest rate differential does not explain the dynamics of aggregate capital and Foreign Direct Investment (FDI) flows, but significantly explains Foreign Portfolio Investment (FPI) flows. Also, Movement in real exchange rate is significant in explaining outflows and inflows in FPI, and inflows in FDI, but neutral to aggregate capital flows. The study concludes that deviations from interest rate parity provides opportunities for interest rate and currency arbitrage in Nigeria but using aggregate capital flows mask this evidence. The study therefore recommends that the CBN should focus on exchange rate stabilization policies, so as not only to discourage FPI reversal but to also enhance FDI inflow. This can be done by putting in place foreign reserve accretion measures to boost the ability of the CBN to defend the Naira. The new policy initiative on remittances is a right step in the right direction as it could boost external reserve.

The Impact of Private Capital Flows on Economic Growth in the MENA Region

The aim of the article is to conduct an empirical analysis of the impact of aggregate and disaggregate private capital flows on economic growth in eleven MENA countries between 1980 and 2018. Unlike prior empirical studies, the fixed effect panel quantile approach developed by Canay (2011) is implemented. Findings suggest that there is a significant difference in the effects of private capital flows on economic growth across lower and higher quantiles. More specifically, the effects of total private capital flows, foreign direct investment flows, portfolio flows and debt flows are positive and statistically significant only for low and medium quantiles, indicating that the enhancing impact of private capital flows in terms of economic growth is only confirmed in countries with relatively low and medium growth rates. Moreover, debt flows affect economic growth in countries recording high growth rates, stressing the importance of financial development in routing those flows into the most productive projects in the economy.

Post-Crisis Capital Controls in Developing and Emerging Countries: Regaining Policy Space? A Historical Materialist Engagement

Recent political economy scholarship has interpreted the recent resurgence of capital controls across the Global South as attempts by some developing countries to preserve their policy space to pursue heterodox economic policies. This article critically engages with this literature and argues for the need to study capital controls in light of the social constitution and the class character of the capitalist state, money, and private capital flows. This argument is substantiated through a class analysis of the deployment of capital controls in Brazil from 1945 to 2014, which emphasizes the crucial role that capital controls have historically played in the reproduction of capitalist social relations and particular forms of class rule in Brazil.JEL Classification: F30, F32, F38, F54