Experts raise 2014 forecast for capital inflows to emerging markets by $130 billion
Capital flows to emerging markets have continued to be very choppy this year according to the latest Capital Flows Report by the Institute of International Finance. The period from March to July was marked by a surge in portfolio equity and debt inflows, particularly to Asia, followed by a sharp slowdown since August.
The IIF has raised its 2014 forecast for total private capital inflows to emerging markets by $130 billion to $1,162 billion. This is a decline from $1,241 billion in 2013, primarily due to the collapse of flows to Russia.
“Divergent paths for G3 monetary policies are adding to the volatility of capital flows to emerging markets. Increasing hopes for further easing by the ECB and potentially by the Bank of Japan have supported capital flows in recent months, while the Fed’s steps towards exit have been slow,” said Charles Collyns, chief economist for the IIF. “Going forward, however, there is an increased risk of abrupt shifts in expectations about G3 monetary policy paths, which could spark a rise in risk aversion and a retrenchment of EM capital flows. While our baseline outlook for total EM capital inflows is quite benign, we worry about the potential for a sharp rise in stress.”
“One of the interesting findings is evidence of declining correlation among emerging markets—reflecting more differentiation by international investors across EMs depending on their fundamentals,” said Hung Tran, executive managing director at the IIF. “Consequently, good policy matters, helping to contain the volatility of capital flows which has been at times a challenge to EM policy makers.”
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. Within its membership IIF counts commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.