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IIF – Emerging markets will suffer first net capital outflows since 1988

The IIF, a global umbrella organisation for the finance industry, estimates total capital flows (foreign direct investments, bank loans and portfolio flows) to emerging markets to halve to just $548bn this year. Because capital outflows by emerging market residents, which are projected to reach $548bn in 2015, have been steadily on the rise since 2009, net capital flows will now be negative.

Outflows from listed investments in equities and bonds have been most pronounced, as they are liquid investments which are easy to withdraw. Emerging market equity funds saw outflows of more than €10bn in August alone, while emerging market bonds witnessed net redemptions of €7.8bn.

Though the turn in capital flows from EM has been gradual, this is not to say there is less reason to worry than in 2008, when capital outflows from EM were driven by external factors (i.e. the collapse of the banking system in advanced economies). This time around they “reflect a sustained slowdown in EM growth, amplified by rising uncertainty about China’s economy and policies,” according to the IIF.

Most of the reduction in inflows into emerging markets can indeed be attributed to China (see chart), but there are more problems emerging markets are facing on the medium, or even the short term. Not only is annual GDP growth in EM now only about half the average of the preceding 10-year period, growth in many countries has been fuelled by debt.

Part of the Bonhill Group.