LONDON — The flow of fresh funds to emerging markets should recover this year and next after a flood of money over the past decade, fuelled by loose monetary policy in the United States, Europe and Japan, the Institute of International Finance (IIF) said on Friday.
The IIF — a global association of the financial industry with close to 450 members from 70 economies including commercial and investment banks, asset managers, insurance firms, sovereign wealth funds, hedge funds, central banks and development banks — predicted non-resident capital flows of $1.26 billion in 2019, up from $1.14 billion in 2018, and another modest recovery next year.
“Global growth is looking more positive, but the world is a more difficult place for emerging markets that depend on foreign capital inflows,” the report said.
Quantitative easing by G3 nations in recent years helped funnel funds to emerging markets, in search of yield. That led to a “positioning overhang,” with investors overloaded on emerging-market assets, the IIF said.
Flows to China accounted for much of the recovery in the first quarter, it said. Excluding China from previous quarters showed successive recoveries were weaker.
“Despite a positive growth backdrop, capital flows to non-China emerging markets will recover modestly in 2019 and 2020, while remaining short of the levels observed in 2017,” the report said.
Total net capital flows to China are projected to reach $50 billion in 2019 and $110 billion in 2020, the IIF said.
Non-resident capital inflows to Turkey should start to increase in the second half of 2019, assuming credible structural reforms helped to improve sentiment. But net inflows of non-resident capital are likely to moderate further in 2019, in step with the projected fall in output, the IIF said. Turkey’s lira has come under renewed pressure in recent weeks, after shedding nearly 30 percent against the dollar last year. That led to local banks halting lending to their overseas counterparts last week, a move that spooked foreign investors. — Reuters