Emerging markets will suffer a net outflow of capital this year for the first time since the 1980s as their economic fortunes darken and the US Federal Reserve prepares to lift interest
rates.
The projection will heighten concerns about the prospects for the leading emerging economies, including China and Brazil, that are set to weigh on central bankers and finance
ministers when they convene for annual meetings of the International Monetary Fund and World Bank in Lima next week.
The Institute of International Finance said it expected foreign investor flows to EMs to fall to just $548bn this year, lower than levels recorded at the height of the global financial crisis.
Combined with accelerating outflows from resident investors, it said net capital outflows would amount to $540bn this year, the first time this had been seen since 1988. That follows
inflows of $32bn in 2014.
Christine Lagarde, IMF managing director, warned this week that emerging nations faced a fifth consecutive year of slowing growth, adding that a rise in US interest rates might
exacerbate conditions in some economies.
The prospect of a Fed interest rate increase has been haunting financial markets all year. Adding to the worries is the uncertainty surrounding the timing of the rate move, with Janet
Yellen, Fed chair, and her colleagues holding fire in September in part because of the turbulence in global markets.
“Flows to EMs have weakened sharply in volatile market conditions and [following] a jump in risk aversion,” said Charles Collyns, the IIF’s chief economist. “We now project overall
negative flows for the first time since the emerging markets concept was first devised in the late 1980s.”
Mr Collyns said that, unlike the crisis of 2008, the factors driving capital flows this year were largely internal to emerging markets.
“There are increasing concerns about a slowdown in EM growth, amplified by rising concerns about China and continuing uncertainty about Fed liftoff,” he said. “The factors holding
back flows will be persistent, implying a protracted drought rather than quick relief.”
The IIF estimates that private outflows from EMs will amount to more than $1tn this year. Mr Collyns said the biggest single cause of outflows was repayments of foreign currency
loans by EM companies, especially in China.
The IIF estimates that indebtedness at nonfinancial corporations in EMs has increased more than fivefold over the past decade to $23.7tn.
“The speed in the buildup of debt has been staggering,” said Hung Tran, the IIF’s executive managing director. “All the research shows that the speed of incurring debt plays a key
role in the quality of that debt and in the subsequent crisis. We do see an increasing burden on corporate borrowers to service that debt.”
Jonathan Wheatley and Sam Fleming
