Net capital flows for emerging market economies is projected to be negative in 2015, the first time since 1988, the Institute of International Finance (IIF) has noted in its latest report. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China, it added.
The data come on the heels of a separate IIF report this week that showed portfolio capital outflows in EMs amounted to $40 billion during the third quarter, the worst performance since 2008. Covering a group of 30 economies, the IIF report estimates net non-resident inflows at $548 billion for 2015 from $1,074 billion last year — levels not seen since the global financial crisis.
The situation is exacerbated by the fact that investors residing in emerging market countries are buying more foreign assets. Known as resident outward investment flows, 2015’s reading is expected to hit a historical high of $1,089 billion, which is likely to further pressurise reserves, exchange rates and asset prices of EMs, the IIF said. “On a net basis, lower inflows and rising outflows imply that private capital is leaving EMs for the first time since the early 1980s.”
“It is noteworthy that a large part of the decline in overall flows this year is attributable to flows out of China, which intensified after the People’s Bank of China announced a mini-devaluation of the renminbi and a shift to a more market-oriented exchange rate fixing regime in August.”
The high level of non-financial corporate debt as a share of GDP is a major, underlying reason for sustained pressure on EM asset prices, pointed out Hung Tran, executive managing director at the IIF. “As monetary policy continues to diverge and the Fed begins liftoff, countries with large amounts of corporate debt, especially in US dollar, will face difficulties, with rising prospects for corporate distress, weakening capital investment and growth.” The IMF also signaled out corporate debt as an area of caution in its Global Financial Stability report this week. Emerging market firms now boast a record $18 trillion of debt, with the largest increases in leverage in highly vulnerable sectors, such as construction, mining and oil, the IMF said.
Things are, however, not likely to be as bad as in 2008. “Unlike the 2008 crisis, the reasons are largely internal rather than external — related to rising concerns about economic prospects and policies in China, coupled with broader uncertainties about EM growth prospects,” noted Charles Collyns, MD and chief economist at the IIF.