Washington, D.C., May 29, 2014 - The Institute of International Finance, the global association of the financial industry, today lowered its forecast for private capital flows to emerging markets in 2014 by $47 billion to $1,032 billion relative to its January report, largely due to weaker inflows in 2014H1 as the Ukraine crisis is weighing heavily on flows to Russia.
"The environment for capital flows to emerging markets has become very supportive as the global economy gains momentum, risk aversion has come down to very low levels, and U.S. long-term interest rates have eased," said Charles Collyns, chief economist at the IIF. "Portfolio flows have surged in recent months according to our Portfolio Flows Tracker, although the overall level of flows has taken a hit from the fallout of the Ukraine-Russia crisis."
"s private inflows increase, we will continue to see investor differentiation across countries and regions," said Hung Tran, executive managing director at the IIF. "Countries that have reduced macroeconomic vulnerabilities will be less affected by stress and see stable capital inflows, while those that delay reforms remain more exposed to swings in capital flows."
Overall, the IIF now projects private flows to EMs in 2014 to be about $120 billion lower than in 2013. This decline in part reflects that the IIF now anticipates a decline in inflows to China, given the government's efforts to discourage short-term capital inflows, as well as the impact of the Ukraine-Russia crisis.
IIF projects a gradual recovery of private inflows in 2014H2 and 2015, as a slowly improving global macro picture and favorable risk appetite continue to support capital flows to emerging markets, although as a ratio to GDP capital flows would still decline in 2015. Portfolio rebalancing by mutual fund investors could also prove supportive, given the marked decline in valuation for emerging market equities over the past few years and the continued appeal of high-yielding emerging market bonds in a low-rate environment.
The IIF assessment is in line with its latest Portfolio Flows Tracker , also released today, which indicated an increase in both equity and bond inflows to $45 billion in May, the highest level since September 2012, continuing the pick-up in flows seen in recent months.
The IIF noted that capital flows to emerging markets remain vulnerable to contagion from a possible further escalation of the Ukraine-Russia crisis as well as surprises in the timing, pace and magnitude of eventual Fed policy tightening. For example, the IIF's econometric analysis suggests that if investors come to anticipate that the Fed will tighten interest rates at a faster pace equivalent to that in the mid-2000s, then private capital flows could decline by around $110 billion or 0.65 percent of emerging market GDP.
The Institute of International Finance is the global association for 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. Within its membership IIF counts leading global banks, insurers, pension funds, asset managers and sovereign wealth funds, as well as leading law firms and consultancies. For more information visit www.iif.com.