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BRICS economies seem to lack absorptive capacity and the wherewithal to convert capital flows into investible resources, said Reserve Bank of India Governor Urjit Patel.
Patel, who spoke at a BRICS (Brazil, Russia, India, China and South Africa) seminar on investment flows (organised jointly by the Finance Ministry along with the RBI and the Securities and Exchange Board of India), highlighted this issue in the context of capital flows to emerging markets flowing and ebbing umpteen times in 2016 so far.
“First, with current account deficit and surpluses low and set to narrow, our economies seem to be reflecting lack of absorptive capacity and the wherewithal to convert capital flows into investible resources,” the Governor said.
This has to be viewed in the context of ultra low cost of overseas finance, especially in mature markets, and the ability of large pools of footloose capital given out to seek returns, he added. The Governor felt that there is a need to manage commodity price cycles better. “…We must work on mechanisms that even out large real economic impacts over the duration of the (commodity) cycle so that in the net our economies are not worse off. This seems to be a potential area of collaboration of mutual benefit and interest amongst the BRICS countries.”
Patel emphasised that BRICS countries need to work hard to improve the business environment in their economies so that they can attract investments.
Key challenges The main challenge to energising investments in BRICS economies, according to the Governor, is the risk of global headwinds.
He observed that the second challenge is the management of spillovers in view of the uncertainty injected into the business climate and prospects for returns by bouts of financial market turbulence, usually on account of policy uncertainty from the systemic central banks of the world.
“The third item which has now entered the lexicon is that of political risk. Potential unconventional sources such as the Black Swan type of events like the Brexit vote, the US Presidential election process and the political realignments, towards the fringes (left or right), in Europe are a blip on our radar and affects our policies going forward,” explained Patel.
Monetary authorities in the BRICS countries are particularly besieged since inflation, interest rates, exchange rates and level of reserves are some of the main variables which influence country allocations and foreign investors’ portfolio decisions, the Governor said.
Consequently, even though the sensitivity to spillovers has waned, managing them requires significant resources and policy attention.
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