Washington, D.C., May 28, 2015 - Capital flows to emerging markets are projected to slow to $981 billion in 2015, their lowest level since 2009, according to the IIF's May report on Capital Flows to Emerging Markets.
"Weak EM growth performance is taking a heavy toll on capital inflows to EMs, which we now estimate at only $150 billion in Q1 2015, the lowest rate in six years", said Charles Collyns, chief economist at the IIF.' "We do project a moderate pickup of flows later in 2015 and 2016, but this depends on some strengthening of growth and no surprises from the Fed. Continued economic weakness or a bumpy Fed ride could lead to further stagnation of EM capital inflows."
' " deterioration of secondary market liquidity and increased corporate indebtedness across emerging markets could exacerbate the fallout from a potential EM stress event," said Hung Tran, executive managing director at the IIF. "In an environment of rising global interest rates, Fed tightening, EM currency depreciation, and slowing economic growth and capital flows, USD-denominated debt may become more difficult for many EM non-financial corporate companies to service and refinance their debt."
The IIF noted that capital flows have continued to be volatile over the past few months, especially portfolio flows. Introduction of quantitative easing by the European Central Bank and a shift in market expectations towards a slower Fed exit supported portfolio flows in the first few months of 2015. Subsequently, portfolio flows suffered a retrenchment in May as reported in the May 2015 EM Portfolio Flows Tracker.
The IIF projects flows to rise to $1,158 billion in 2016, assuming a gradual Fed exit, a pickup in EM growth, and reduced political uncertainties. However, the report stressed downside risks related to continued stagnation in global growth and to more aggressive Fed rate increases that could be prompted by further U.S. labor market tightening.
Resident capital outflows are projected to stabilize in 2015 with a continued shift towards private sources and away from official reserve accumulation. Taking also into account declining oil revenues for oil exporters, EM official reserve accumulation is projected to decline further to $74 billion in 2015, down from $540 billion in 2013.
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.