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Emerging markets to see fourth year of net capital outflow in 2017: IIF

[LONDON] Emerging markets will see net capital outflows in 2017 for the fourth year in a row, the longest stretch on record, but the projected US$206 billion will be much less than the US$373 billion expected this year, a report said on Thursday.

The Institute for International Finance, one of the most authoritative trackers of capital flows to and from the developing world, predicts US$769 billion in private non-resident inflows into emerging markets in 2017. That is up from this year's US$640 billion, a reflection of improving flows to banks, stocks and bonds.

But these inflows will be offset by money sent offshore by residents of developing countries, especially China which accounts for much of the US$206 billion net capital flight, the IIF said.

Net capital flight was as high as US$739 billion last year.

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Emerging markets have broadly outperformed developed peers this year and the IIF said the turnaround in capital inflows had been supported by loose monetary policies from central banks in developed economies and rock-bottom global bond yields.

"Following their revival earlier this year, capital inflows to emerging markets should continue to improve gradually in the coming quarters," the group said in its report.

Portfolio capital flows to emerging stock and bond markets were projected to climb to US$208 billion next year, from US$157 billion this year and US$100 billion in 2015.

The biggest gains in private capital inflows are expected in Asia, which should see an increase of US$70 billion to US$348 billion driven by China and India.

But the IIF warned that "in 2017 a shift to less accommodative monetary policy - notably increases in the Fed funds rate - is likely to present more of a challenge." The US Federal Reserve this week signalled it was likely to raise interest rates in December. Political risks, including those stemming from the backlash against globalisation in the West, as well as a possible loss of confidence in the Chinese yuan, were also challenges, the IIF added.

While the prospect of continued low or negative returns in mature economies would remain a dominant force in 2017, the effect would be felt less than in 2016, the IIF said.

"We may well have reached (or even passed) peak easy money," it added.

Foreign direct investment (FDI) - bricks-and-mortar investment into factories and real estate - continues to decline. This is expected to fall to a post-crisis low of US$429 billion in 2016, with little improvement in 2017 to US$441 billion. This was due mainly to a reduction in FDI into China.

Outward direct investment from emerging markets is expected to remain near an all-time high of US$366 billion in 2017, the IIF found, a reflection of the growing global clout of businesses based in the developing world. China accounts for almost two-thirds of this volume.

China will be the key factor determining when emerging markets flows return to positive territory, IIF chief economist Charles Collyns told reporters in a briefing call.

That is because the outflows are entirely from China as companies and individuals invest heavily overseas, including in real estate.

The course of China's currency the yuan will be another key indicator, IIF managing director Hung Tran said. If the currency continues weakening against the dollar then continued net outflows are to be expected, he added.