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Investment and its Financing: A Macro Perspective
Annex to the G-20 Surveillance Note
Meetings of G-20 Finance Ministers and Central Bank Governors
February 15–16, 2013
Moscow
G R O U P O F T W E N T Y
Prepared by Staff of the
I N T E R N A T I O N A L M O N E T A R Y F U N D
Does not necessarily reflect the views of the IMF Executive Board.
2
SUMMARY1
Since the great recession, investment has been very weak in advanced economies, while it has
been strong in many emerging economies, particularly in emerging Asia. Going forward,
continuing sluggish investment in advanced economies, and to some extent in emerging
Europe, may weigh down on potential output, and growth, over the medium term. Investment
financing has evolved broadly in line with the relative economic performance of the G-20
members. FDI inflows to emerging Europe declined as corresponding outflows from advanced
economies receded some, but FDI inflows to emerging Asia and Latin America have remained
broadly at pre-crisis levels. Total bank credit in emerging Asia and Latin America has grown
strongly, but stagnated somewhat in advanced economies and emerging Europe, in part due to
reduced foreign bank funding. A “search for yield” and substitution away from costly bank
financing has boosted bond issuance by non-financial corporates in both advanced and
emerging economies.
I. INTRODUCTION
1. Toward achieving its shared objectives of strong, sustainable and balanced growth, the
G-20 is devoting greater attention to investment and long-term financing issues. At Los Cabos,
G-20 Leaders agreed to ―intensify our efforts to create a more conducive environment for
development, including supporting infrastructure investment.‖ 2 Many have noted that, in the
wake of the crisis, underlying forces—such as ―flight to safety‖ and bank deleveraging in
advanced economies—may have affected the availability of affordable financing for
investment in emerging economies. At the November 2012 Ministerial, G-20 members
acknowledged the importance of long-term financing for jobs and growth and asked
relevant International Organizations (IOs), including the IMF, to undertake further diagnostic
work to assess factors affecting its availability. 3
2. This note analyzes the impact of the crisis on investment and its financing from a
macroeconomic standpoint. At a high level, it examines the relative recovery in investment
across G-20 countries, including emerging members. The analysis also studies
1 Prepared by a team from the IMF’s Research Department, led by Hamid Faruqee and Emil Stavrev and including
Joong Shik Kang, Chanpheng Fizzarotti, Daniel Rivera, and Anne Lalramnghakhleli Moses.
2 Communiqué of Meeting of G20 Finance Ministers and Central Bank Governors (Mexico City, November 5,
2012). http://www.g20.org/load/780984360.
3 For a more detailed discussion on infrastructure investment, see the umbrella report prepared by the World
Bank with inputs from the IMF, OECD, UNCTAD, UN-DESA, and FSB.
3
macroeconomic sources of investment financing, including external financing and local
financing through bank credit and capital markets.
II. Background
3. During the Great Recession, the global economy experienced its most severe and
synchronized decline in activity since World War II. World output declined by 0.6 percent in
2009, compared with an average growth of about 4.0 percent between 2000 and 2008, and
world trade volumes fell by more than 10 percent. So far, the recovery has been unusually
uneven across advanced and emerging economies.
In advanced economies, the recovery has been very weak. This likely reflects the
legacies of the crisis and ongoing fiscal consolidation. Growth of both consumption
and investment has been appreciably slower compared to past recoveries.
In contrast, emerging economies have performed better than in past recoveries. Overall,
emerging economies have witnessed strong growth, driven largely by buoyant
consumption and investment growth, vibrant asset markets, strong capital inflows,
and expansionary policies. Emerging Europe is a notable exception to these trends,
having suffered a financial shock very similar to that experienced by many advanced
economies.
III. INVESTMENT AND ITS FINANCING
Investment and Saving
4. Similar to activity, investment developments have been markedly different across
advanced and emerging economies, as well as within emerging economies. Investment in
-1
0
1
2
3
4
5
6
-15
-10
-5
0
5
10
15
00 02 04 06 08 10 12
Trade volume (goods and services)Real GDP growth (RHS)
Global Growth and Trade(Percent; year over year)
Source: IMF, World Economic Outlook.
-10
-5
0
5
10
15
20
25
30
35
40
Adv. Emg. Asia
Latin America
Emg. Europe
Oil Exporters
2012 2011 2010 2009
Real GDP growth(Percent; year over year)
Source: IMF, World Economic Outlook.
4
advanced economies fell sharply in the wake of the crisis (by more than 15 percent) and has
recovered only very slowly thereafter due to several factors, including depressed demand,
uncertainty, and weak growth prospects. As a result, it still remains below the pre-crisis level
(by about 10 percent), leaving the investment-to-GDP ratio below the pre-crisis level by
about 2.5 percentage points. In contrast, investment growth in emerging economies overall
has increased during the crisis, largely driven by China. However, there have been
appreciable differences in investment performance across regions (Figure 1). Specifically:
In emerging Asia, investment has accelerated since the crisis, on the back of
substantial fiscal stimulus, particularly in China. As a result, the investment-to-GDP
ratio increased to about 41 percent from about 36 percent of GDP before the crisis.
In oil exporting countries, investment stagnated with the collapse of the commodity
prices in 2009–10, while it declined in Latin America. However, investment recovered
strongly thereafter, supported by fiscal stimulus and a recovery of oil prices; and has
significantly surpassed its pre-crisis levels.
In emerging Europe the recovery in investment has been slow relative to other
emerging economies. Accordingly, the investment-to-GDP ratio still remains below
its pre-crisis peak by more than 2 percentage points. This slow recovery is partly due
to the ongoing bank deleveraging in advanced Europe, which was an important
source of investment funding before the crisis, as discussed below.
5. From a saving-investment perspective, advanced economies have continued to rely on
foreign saving, while emerging economies, on average, have generated positive net saving.
During the pre-crisis boom, advanced countries as a
group relied on external funding to finance increasing
investment needs while saving remained relatively
stable. The current account deficit for G-20 advanced
economies peaked at about 1¾ percent of their
aggregate GDP in 2006. On the back of a large fall—
and subsequent slow recovery—in investment,
advanced economies’ needs for external financing
declined by more than 1 percentage point of GDP
after the crisis. In contrast, saving has exceeded
investment in emerging economies, leading to them
to export saving abroad. However, there are marked
differences across emerging economies (Figure 2).
Historically, saving in emerging Asia has been more than sufficient to finance high
levels of investment, leading to large external surpluses. More recently, strong
-10
-5
0
5
10
15
20
25
00 02 04 06 08 10 12
Advanced Emerging Asia
Latin America Emerging Europe
Oil Exporters
Current Account Balance(Percent of Regional GDP)
Source: IMF, World Economic Outlook
5
investment growth has helped current account surpluses decline to less than
1 percent of GDP in 2012.
Latin America relied on external funding for an extended period until the early 2000s
due to low domestic saving. Domestic saving though outstripped investment during
the strong commodity price boom in mid-2000s. However, since the crisis, reliance
on foreign funding has increased.
Oil exporters’ saving behavior largely reflects oil-price developments. The current
account surplus of oil exporters—currently in excess of 10 percent of GDP—is very
similar to that observed during the pre-crisis period.
The pre-crisis reliance of emerging Europe on external funding to finance strong
investment and growth is well known. Low saving in the region was offset by large
inflows of foreign capital, with large current account deficits peaking at about
8 percent of GDP in 2007. Although investment has declined significantly after the
crisis, the region continues to rely on foreign funding due to its still-low domestic
saving.
External Financing
6. With respect to the pattern of capital flows, surplus emerging economies have
generally accumulated reserves, largely matched by net portfolio inflows in advanced deficit
economies—who remain providers of direct investment abroad (Figure 3).
Advanced economies continue to export their funding in the form of direct
investment. At the same time, to fill the gap between their saving and investment,
they have counted on net portfolio inflows. Partly due to deleveraging pressures in
the public and financial sectors, advanced economies’ direct investment flows abroad
have declined some, while external deficits narrowed and portfolio inflows declined.
In the pre-crisis period, emerging Europe relied heavily on FDI and foreign bank
funding to meet its large investment needs. However, with ongoing bank
deleveraging in advanced economies, both FDI and bank funding inflows have
dropped significantly, alongside a sizable narrowing of current account deficits (to
about 5½ percentage points of GDP). At the same time, portfolio investment flows
have picked up strongly in recent years.
FDI flows to Latin America remained positive, on net, during the commodity price
boom in the mid-2000s, with this trend continuing after the crisis. As the economies
in the region recovered strongly, net portfolio investment flows have picked up, while
reserve accumulation has also continued.
6
Emerging Asia and oil exporters have continued to export their saving largely in the
form of reserve accumulation, but at slower pace. At the same time, there have been
steady capital inflows to emerging Asia, mainly in the form of foreign direct
investment.4
Financing through Banks and Capital Markets
7. Bank credit in emerging Asia and Latin America has grown strongly, in line with strong
investment.5 While total bank credit in advanced economies and emerging Europe has
stagnated, credit in other emerging economies—in particular in emerging Asia and Latin
America—has risen significantly.
8. Borrowers’ reliance on foreign bank credit (upstream exposure) has declined
significantly in advanced economies and recovered strongly (or remained stable) in emerging
economies.6 As of the second quarter of 2012, ―upstream exposure‖ in advanced economies
moderated to about 60 percent of foreign bank claims, while in emerging Asia, emerging
Europe, and Latin America it was about 60, 50, and 40 percent, respectively (Figure 4). The
evolution of upstream exposures across countries show that:
Advanced economies, especially in the euro area periphery, experienced a significant
fall in direct-cross border bank financing as the European banks deleveraged as well
4 Within Emerging Asia, while capital flows to China have been relatively stable, the other countries experienced
relatively large swings in FDI and portfolio flows after the crisis.
5 Total bank credit to the nonbank sector includes credit by locally incorporated banks (both domestic and
foreign owned) and direct cross-border credit.
6 Borrowers’ upstream exposure includes both direct cross-border lending by international banks and the
proportion of lending by foreign affiliates that was not funded with local deposits. This better captures the size of
foreign banking exposures than BIS foreign claims that add direct cross-border and foreign affiliates’ claims.
0
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40000
50000
60000
70000
80000
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15000
20000
25000
06 07 08 09 10 11 12
EmergingEmerging AsiaAdvanced (RHS)
Sources: IFS, BIS, and IMF staff calculations.
Total Credit to Non-Banks(Billions of U.S. Dollars)
0
500
1000
1500
2000
2500
3000
3500
4000
2006 2007 2008 2009 2010 2011 2012
Latin America Emerging EuropeOil Exporters
Sources: IFS, BIS, and IMF staff calculations.
Total Credit to Non-Banks(Billions of U.S. Dollars)
7
as a decline in non-local deposit funded affiliates’ claims with the onset of the crisis.
There is still no sign of recovery in foreign bank credit as banks deleverage their
exposures to these economies.
Upstream exposure in emerging Europe has been relatively stable in part due to the
Vienna Initiative—a framework to safeguard the financial stability of the region.
However, it has declined since mid-2011 with the re-intensification of the financial
crisis.
Direct cross-border claims by foreign banks in emerging Asia and Latin America also
fell sizably after the crisis but have since rebounded. In Latin America, foreign
affiliates’ claims based on non-local deposit funding have also recently increased, but
their share of foreign affiliates’ claims is still lower than in emerging Europe.
9. Bond issuance by non-financial corporates has
increased strongly in both advanced and emerging
economies. This has been supported by a ―search for yield‖
and substitution for bank financing, which become more
costly as banks continue to deleverage. In contrast, after
some rebound, equity issuance declined significantly in all
emerging country regions, while moving broadly sideways
in advanced economies (Figure 5).
IV. CONCLUSIONS
10. Recovery of investment has been uneven across regions. Investment in many emerging
economies has performed well since the crisis, but it has been relatively weak in advanced
economies.
11. From a macro standpoint, emerging countries, generally, have shown resilience in
investment, supported by good policies but also strong credit growth. FDI flows to emerging
Asia and Latin America have remained broadly at pre-crisis levels, while net portfolio
investment picked up on the back of relatively strong growth and low interest rates in
advanced economies. Bond issuance has increased strongly, partly due to a search for yield.
Total bank credit in emerging Asia and Latin America has also grown. However, domestic
vulnerabilities could reemerge as several economies are already in a late-credit cycle. Thus,
to guard against the associated risks, the general challenge for emerging economies is to
rebuild their policy space.
12. Emerging Europe is an exception with sluggish investment. The investment-to-GDP
ratio here still remains below its pre-crisis peak. Reduced FDI and bank inflows have
dampened investment activity, which had been reliant on external financing. Total bank
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600
700
800
900
2005 2006 2007 2008 2009 2010 2011 2012
Sources: Bloomberg L.P.
JP Morgan EMBIG Spread Index
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credit has stagnated, in part due to a decline in non-local deposit-based foreign banks’
funding as bank deleveraging in advanced Europe has continued.
13. In advanced economies several factors have hindered investment after the crisis.
Depressed demand, impaired financial sectors, and weak growth prospects have all weighed
on capital spending. Foreign bank credit has declined significantly in advanced economies,
particularly in the euro area periphery as cross-border deleveraging of European banks has
been pronounced. IMF surveillance work suggests that financial fragmentation has hindered
credit and raised financing costs in the euro area periphery. In advanced economies more
generally, weak bank credit growth and tight lending standards have hurt investment,
particularly in small and medium size enterprises. Other factors have also played a role, as
investment has not been strong even for large companies with access to market financing.
While further work is needed to pin down root causes behind low investment, the risk for
these economies is that continuing sluggish investment may weigh down on potential
output and growth over the medium term.
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Emerging Europe
Real GDP Real Investment
60
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Oil Exporters
Real GDP Real Investment
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Latin America
Real GDP Real Investment
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Emerging Asia
Real GDP Real Investment
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Advanced
Real GDP Real Investment
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Emerging
Real GDP Real Investment
Figure 1. G-20 Real GDP and Investment(Index; 2000=100)
Source: IMF, World Economic Outlook.
10
Figure 2. G-20 Domestic Savings and Investment(Percent of GDP)
Source: IMF, World Economic Outlook.
-2.0
-1.5
-1.0
-0.5
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Advanced
InvestmentSavingCurrent account balance (RHS)
-3
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Emerging
Investment
Saving
Current account balance (RHS)
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Emerging Asia
InvestmentSavingCurrent account balance (RHS)
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Latin America
InvestmentSavingCurrent account balance (RHS)
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Emerging Europe
InvestmentSavingCurrent account balance (RHS)
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00 01 02 03 04 05 06 07 08 09 10 11 12
Oil Exporters
InvestmentSavingCurrent account balance (RHS)
11
Figure 3. G-20 External Financing(Percent of GDP)
Sources: IMF, Balance of Payment Statistics; IMF staff calculations.
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95 97 99 01 03 05 07 09 11
AdvancedCapital accountNet errors and omissionsReservesDirect PortfolioOther Financial AccountFinancial derivativesCurrent account deficit
-10
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95 97 99 01 03 05 07 09 11
Emerging
Capital accountNet errors and omissionsReservesDirect PortfolioOther Financial AccountFinancial derivativesCurrent account deficit
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95 97 99 01 03 05 07 09 11
Emerging Asia
Capital accountNet errors and omissionsReservesDirect PortfolioOther Financial AccountFinancial derivativesCurrent account deficit -6
-4
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95 97 99 01 03 05 07 09 11
Latin America
Capital account Net errors and omissions
Reserves Direct
Portfolio Other Financial Account
Financial derivatives Current account deficit
-6
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95 97 99 01 03 05 07 09 11
Emerging Europe
Capital accountNet errors and omissionsReservesDirect PortfolioOther Financial AccountFinancial derivativesCurrent account deficit
-18
-14
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-6
-2
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18
95 97 99 01 03 05 07 09 11
Oil Exporters
Capital account Net errors and omissionsReserves Direct Portfolio Other Financial AccountFinancial derivatives Current account deficit
12
Figure 4. G-20 Banks' Foreign Credit(Billions of U.S. Dollars)
Sources: BIS; IFS, ECB, Bankscope, and IMF staf f calculatons.
0
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Direct Cross-Border ClaimsAffliates ClaimsOn-balance sheet upstream exposure
Advanced
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Emerging
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Emerging Asia
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Latin America
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Direct Cross-Border ClaimsAffliates ClaimsOn-balance sheet upstream exposure
Emerging Europe
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Direct Cross-Border ClaimsAffliates ClaimsOn-balance sheet upstream exposure
Oil Exporters
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Figure 5: G-20 Equity and Bond Issuance by Non-finanicial Corporate (Billions of U.S. Dollars)
Source: Dealogic.
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Bonds Equities
Advanced
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Bonds Equities
Emerging
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Bonds Equities
Emerging Asia
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Bonds Equities
Latin America
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Bonds Equities
Emerging Europe
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Bonds Equities
Oil Exporters