Gross capital flows to developing countries rose strongly in the second half of 2012, buoyed by accommodative monetary policies in high income countries. Industrial activity in high income countries is declining, despite strengthening domestic demand in the US. In contrast, business sentiment in developing countries remains robust and industrial activity is strengthening.
Capital flows to developing countries rose to $170bn in Q4 2012.
Flows weakened mid-year due to Euro Area turmoil, but they bounced back strongly in the second half of 2012, with fourth quarter flows reaching about $170 billion—close to a record inflow. However, this represented only 2.8 percent of developing-country GDP, well below the earlier record of 3.5 percent recorded in Q3 2010.
Accommodative G3 monetary policies and improving risk perceptions were among drivers, with bond issuance recovering the most forcefully, almost doubling from $39 billion in the second quarter to $74 billion in the fourth quarter. Syndicated bank lending has recovered as well, rising to a post-crisis high of $63 billion in Q4 ($37 billion in Q2), which likely reflects the diminishing intensity of Euro Area deleveraging.
Equity issuers also took advantage of the search for returns among investors in high income countries, with equity issuance rising to $33 billion in Q4 ($22 billion in Q2) .
