Washington D.C., October 7, 2013 - Capital flows to emerging economies have seen a sharp retrenchment in recent months, but should recover gradually in coming quarters according to the latest Institute of International Finance (IIF) Capital Flows Report. On an annual basis, total capital inflows will be lower in both 2013 and 2014 (see Table below) than in 2012. Compared to the IIF's June 2013 report, the annual forecasts are down by approximately $80 billion for both years.

"The continuing concerns over the normalization of monetary policy by the Fed together with a less positive assessment of emerging market growth prospects are causing investors to be more cautious," said Charles Collyns, managing director and chief economist at the IIF. "Nevertheless, we are projecting a gradual recovery in flows, barring any major shifts in the markets' views on likely Fed actions. While capital inflows will be less buoyant than in recent years, emerging markets should continue to benefit from higher growth compared to advanced economies and further financial market development."

The report noted a number of downside risks surrounding its relatively benign outlook:

• Further reassessment of the Fed's likely exit timeline could spark another major retrenchment in capital flows to emerging markets, particularly if this occurs in the context of increased uncertainty and heightened investor risk aversion.
• Further deterioration in perceptions of emerging market growth prospects could also dampen capital flows.
• At the individual country level, economies with large external financing requirements that suffer a negative reassessment of underlying fundamentals will remain particularly vulnerable to funding pressures.

The report also noted upside risks to the capital flows outlook, notably over the medium-term:

• Despite the reduced projections for emerging market growth, in aggregate emerging market economies are still projected to outpace the advanced economies by a considerable margin.
• Over time further progress towards financial market development and international financial integration, as well as continued increase in EM output as a share of the global GDP, should lead to a rise in the weight of emerging market assets in global portfolios.

The Institute of International Finance (IIF) is a global association of more than 470 financial institutions. Its mission is to support the financial industry in the prudent management of risks, including sovereign risk; the development of sound industry practices and standards; and the advocacy of regulatory, financial and economic policies that are in the broad interests of its members and global financial stability. Within its membership the IIF counts leading global banks, insurers, pension funds, asset managers and sovereign wealth funds, as well as leading law firms and consultancies. More information about the Institute of International Finance is available at www.iif.com.