Riding the Global Financial Cycle: How Capital Flows into LICs

As low-income countries (LICs) gain access to international capital markets, the scope for increased financing rises but so does the risk of shocks. Our empirical results suggest that, after the global financial crisis (GFC), the global financial cycle has been a significant driver of private capital flows to LICs. In particular, a stronger US dollar (against advanced economy currencies) was associated with weaker net inflows. We also find that external government borrowing in LICs had a statistically significant but relatively small counter-cyclical component, inversely related to global financial and economic cycles, complementing policy responses to shocks.