EMs to report negative flows for first time since the 1980s

According to a report from the Institute of global Finance (IIF), foreign inflows into emerging markets, covering 30 countries, are on course to fall to $548 billion this year, which would be the lowest level since the height of the financial crisis in 2009.

As a result net capital flows would amount to minus $540bn this year, easing only moderately to $306bn next year, the IIF calculated.

The outflows for the third quarter are split roughly equal between equities and bonds, with equity flows totalling $19bn and debt $21bn, IIF analysts said.

Capital flooded into promising emerging economies in the years that followed the global financial crisis of 2008-09, as investors bet that rapid expansion in countries such as Turkey and Brazil could help to offset stodgy growth in the debt-burdened U.S., Europe and Japan.

Higher capital outflows in many countries have exerted pressure on local currencies, exacerbating worries for a few investors who are now nursing losses on both the underlying asset and the local currency.

Net capital outflows will be at $541 billion, it said.

“It is noteworthy that a large part of the decline in overall flows this year is attributable to flows out of China, which intensified after the People’s Bank of China announced a mini-devaluation of the renminbi and a shift to a more market-oriented exchange rate fixing regime in August”.

The IIF also warned of risks of high-level non-financial corporate debt to gross domestic product ratio in emerging markets.

In its latest global economic outlook.

‘Flows to EMs have weakened sharply in volatile market conditions and a jump in risk aversion, ‘ IFF chief economist Charles Collyns said in the report.

The IIF staunchly disagrees, however.

“(The) slowdown represents a marked intensification of trends that have been underway since 2012, making the current episode feel more like a lengthening drought rather than a crisis event”.

“(The) decline has been driven by a sustained slowdown in EM growth, and in particular by uncertainty about China’s economy amid continuing concerns about the impact of the Fed’s eventual turn to raise United States interest rates”, the IIF said.