Capital Flows to Emerging Markets to Remain Under Stress in 2015

January 15, 2015

Washington, D.C., January 15, 2015 - Capital flows to emerging markets will decline further in 2015, as the Fed starts to raise policy rates and emerging market growth remains lackluster, according to the IIF's January report on Capital Flows to Emerging Markets.

The IIF estimated that total private non-resident capital flows to emerging markets fell by $250 billion last year from an all-time high of $1.35 trillion in 2013, to just under $1.1 trillion in 2014. The IIF said that the decline was accounted for by a collapse in flows to Russia triggered by the Russia-Ukraine conflict, but portfolio flows were affected more generally by episodes of risk aversion, notably in the fourth quarter.

The IIF projected that emerging market capital inflows will fall $25 billion in 2015 to $1.06 trillion, before staging a moderate recovery in 2016 to $1.2 trillion. Macroeconomic fundamentals are likely to weigh against capital flows in 2015, according to the report.

' "fter a rough ride in 2014, we expect 2015 to be another stressful year for capital flows to emerging markets," said Charles Collyns, chief economist at the IIF. "Flows during the year are again likely to be volatile. The Fed's pivot to raising policy rates will be a source of tension, and flows to EMs could take a sizable hit if there is an abrupt upward adjustment in the market's expectation of the likely pace of Fed tightening."

"Country differentiation remains a key theme for 2015," said Hung Tran, executive managing director at the IIF. "While many large emerging market countries with vulnerabilities have sought to strengthen their macro policy frameworks and should benefit from lower oil import bills, analysis of past Fed tightening cycles suggests risks of heightened incidence of EM crises during the year ahead."

 

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The Institute of International Finance is the global association of the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. For more information visit www.iif.com.'

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