Emerging Market capital flows to reverse for first time since 1988

Capital flows to emerging markets will turn negative this year for the first time since 1988 amid disappointing economic growth in many EMs and the prospect of rising US interest rates, the Institute of International Finance said on Thursday.

The IIF in a report predicted net outflows of $541bn, compared with inflows of $32bn in 2014

Unlike in the 2008 crisis, the pullback from emerging markets is driven largely by worries about their growth prospects, as well as increased uncertainty about China’s economic prospects and policies, the report found.

It projected only a modest rebound of emerging market capital flows in 2016 as growth prospects continue to falter.

The prospect of further weakening in the Chinese renminbi is a further possible source of risk, the IIF added.

The countries under most threat are those with large current account deficits and big corporate foreign currency liabilities, as well as political uncertainties, with Brazil and Turkey identified by the IIF as sharing those characteristics.

The forecasts covering 30 emerging markets reflect a drop of net non-resident inflows to $548bn, while resident outward flows of investment may rise to $1,089bn, which the IIF said reflected a “sizeable” loss of official reserves.

One particular reason to expect further pressure on asset prices in emerging markets is the higher level of corporate debt, the IIF added.

Hung Tran, managing director at the IIF, said:

As monetary policy continues to diverge and the Fed begins liftoff, countries with large amounts of corporate debt, especially in US dollars, will face difficulties, with rising prospects for corporate distress, weakening capital investment and growth.