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Consequences of a capital account deficit / surplus

A surplus on the capital account means that there are more investment funds flowing into the country than out. This may be to fund a deficit on the current account of the balance of payments. This inward investment may be helpful to the economy and help create jobs and boost growth, but anyone investing in an economy expects a return. This means that a surplus on the capital account will lead to outflows of interest and dividends in the future.

The inflow of funds may exert an upward pressure on the exchange rate as the demand for the domestic currency will increase. This might adversely affect the current account if the increase in export prices makes exports less competitive.

A capital account deficit on the other hand will mean a net outflow of investment funds. This means the country is building up a portfolio of overseas investments, which may lead to future returns of interest, profit and dividends. This may be beneficial in the medium-term. However, short term speculative outflows of funds may have disastrous effects on an economy in terms of the depreciation of the exchange rate, loss of confidence, impact on investment, output and jobs. Several countries in recent years, e.g. Thailand, Indonesia, Russia and Brazil have been badly affected by these speculative outflows of funds.

Below are some links to articles about the Asian financial crisis and the subsequent recovery of many of the economies. You may like to browse some of them to get a feel for the reasons for the financial crisis (N.B. we have focused particularly on Thailand).