Depth report

　　

Some emerging markets are currently adopting a riskier approach to the problem of increasing pressure on their currencies: to prevent capital outflows.

    Azerbaijan, which relies on oil, announced that it will impose a 20% tax on any transaction that takes funds out of the country. Saudi Arabia requires banks with branches in the country to prohibit traders from betting on the devaluation of the country’s currency, the rial. Nigeria recently stopped importing goods such as food and furniture, and imposed spending limits on credit and debit cards denominated in foreign currencies.

    These capital controls are designed to prevent or slow down the rate of capital outflows and at the same time ease the downward pressure on the currencies of these countries. Traders are currently betting that these currencies will fall further. But these measures also risk aggravating the situation. These measures will drive away investors who are annoyed by measures to restrict capital flows, and at the same time hit companies that need to hedge their risks.

    According to George Hoguet, a global investment strategist at State Street Global Advisors, which manages approximately US$2.4 trillion in assets, this is a sign of economic weakness and dramatic changes in terms of trade; Certainty, the risk premium will rise as a result.

    How emerging markets will deal with large-scale capital outflows, weak local currencies, and huge debt burdens is a major issue related to the global economy.

    In the years following the financial crisis, trillions of dollars of capital flowed into emerging markets. However, the continuous slowdown of China's economy and the sharp drop in oil prices and other commodity prices reversed this trend.

    According to the Institute for International Finance, the outflow of funds from emerging markets reached a record US$732 billion in 2015, of which China accounted for the majority.

    At the same time, according to the investment management agency Ashmore Group, the exchange rate of emerging market currencies against the US dollar depreciated by an average of 17.6% last year, and this trend has not shown signs of abating. On Wednesday, the Russian ruble, Mexican peso and Colombian peso all fell to record lows against the US dollar. In the first two weeks of 2016, emerging market currencies depreciated by 3%.

    India, Venezuela and Egypt responded by implementing some form of capital control. Even China has recently tightened controls on capital flows, even though China is in the process of further opening its markets to foreign investors and promoting the internationalization of the renminbi. The Chinese government recently imposed restrictions on forward foreign exchange transactions similar to those in Saudi Arabia and suspended applications for certain types of overseas investments.

    So far, the effects of these policies have been mixed. The capital controls implemented by India in 2013 helped prevent the fall of the Indian rupee and re-added foreign exchange reserves. However, China, Venezuela, and Egypt continue to experience capital outflows, resulting in a reduction in foreign exchange reserves; the currencies of these countries are pegged to the US dollar to varying degrees.

    In the recent capital control guidelines, the International Monetary Fund (IMF) pointed out that disruptive capital outflows may lead to the loss of foreign exchange reserves, the collapse of the local currency, the pressure on the financial system and the decline in economic output. The IMF said that in a crisis situation, capital flow management measures can help prevent a sharp depreciation of the local currency exchange rate and a sharp decrease in foreign exchange reserves.