Emerging market capital flows to hit lowest level since 2009: IIF

[WASHINGTON] Capital flows to emerging economies are projected to fall to US$981 billion this year, their lowest level since 2009, from US$1.05 billion in 2014, due to disappointing economic growth, a drag from a potential US interest rate rise and a drop in investment in Russia, the Institute of International Finance said on Thursday.

Foreign direct investment inflows are forecast to fall to US$529 billion from US$586 billion, largely on the back of declining investment in Russia and China, the body which represents nearly 500 financial institutions said.

At the same time, outward investment by China this year is expected to rise US$38 billion to US$540 billion. Reserve accumulation by emerging economies is expected to slow to US$74 billion from US$110 billion in 2014 and an average US$600 billion in 2004-13.

"Thanks to China, emerging markets on aggregate remain net exporters of capital," the report said.

Capital inflows to Russia have been hit hard by the conflict in Ukraine, the IIF said. Foreign capital outflows rose to US$31 billion in the first quarter from US$24 billion per quarter in the second half of 2014.

Rising concerns over the Turkish central bank's ability to resist calls from the government to ease policy hit flows as well. Portfolio flows are a major source of finance for Turkey.

Under a relatively benign scenario in which the US Federal Reserve starts to hike rates in September on the back of a steadily improving economy, the institute forecast a rise in inflows to US$1.16 trillion in 2016.

The biggest risk to this outlook would be if the US labour market tightened, leading to wage pressures and triggering a more rapid pace of Fed tightening that would result in a "super taper tantrum".

Emerging economies with large current account deficits - South Africa, Brazil and Turkey - are the most vulnerable to shocks, the IIF said. India, which has reduced its current account deficit, is now less vulnerable than it was in 2013.

REUTERS