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Capital Flows To Emerging Markets

Capital Flows To Emerging Markets by Institute Of International Finance

  • Capital flows to emerging markets have weakened sharply in recent months. With non-resident inflows looking likely to fall below 2008 levels and rising resident outflows, we now expect that net capital flows to EMs in 2015 will be negative for the first time since 1988 (Chart 1).
  • Unlike the 2008 crisis, the pullback from EMs has been driven primarily by internal factors, basically reflecting a sustained slowdown in EM growth and amplified by rising uncertainty about China’s economy and policies.
  • We project only a moderate rebound of EM capital flows in 2016 as structural factors continue to weigh on EM growth prospects.
  • Monetary policy divergence in mature markets could contribute to market volatility as the Fed starts to raise rates. The possibility of further RMB weakening is another potential source of risk.
  • Countries most in jeopardy from EM turbulence include those with large current account deficits, questionable macro policy frameworks, large corporate FX liabilities, and acute political uncertainties. Brazil and Turkey combine these features.
  • From a markets perspective, EM equity valuations have fallen to very low levels, but near-term downside risks are high enough to keep investors cautious, absent a clear catalyst for re-entry. Risks for EM corporate bond markets remain elevated, especially given substantial corporate foreign currency exposures as well as pressure on earnings.

Deepening Drought In 2015

Capital flows to emerging markets have weakened markedly this year, after a substantial decline in 2014. We estimate that net non-resident inflows will reach only $548 billion in 2015 down from $1,074 billion last year, sinking below levels recorded in 2008/09. As a share of EM GDP, such inflows have fallen to about 2% from a record high of almost 8% in 2007. Moreover, resident outward investment flows have also accelerated amid the recent turbulence in global...