UK: THE RACE FOR CAPITAL.

UK: THE RACE FOR CAPITAL. - Developing states give OECD rivals a run for their money.

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Last Updated: 31 Aug 2010

Developing states give OECD rivals a run for their money.

One explanation for this year's increase in bond yields is increasing competition for funds on the part of newly industrialising economies. OECD governments and corporations are bidding against borrowers in the fast-growing regions of the Far East and Latin America who, in many cases, can offer a more attractive real rate of return. This is thought to have pushed up real interest rates across the globe.

Rising demand for capital from emerging markets is not a new phenomenon: since 1986 the industrialising countries have raised their borrowing on international capital markets from $19.4 billion to $85.4 billion, doubling their share of total funds raised (see chart). OECD countries still dominate, but on current trends, one dollar in five will be heading for the industrialising countries by the end of the decade.

Figures from the IMF also show how developing countries have increased their imports of capital over the past four years - the counterpart to a rise in their current account deficits. So far this has been accommodated by an improvement in the current account position of OECD countries. But, says Schroder Economics, the situation could deteriorate as the major economies begin to recover. Competition for capital would then intensify. Against this background, it becomes imperative that OECD governments should reduce their budget deficits to prevent further upward pressure on interest rates.

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