Emily Vogl, Frank Vogl
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Net Private Capital Flows to Emerging Markets Set to Decline Modestly
Lower Capital Flows projected in particular into China and Central and Eastern Europe
- Capital flows to emerging economies set to fall by $100 billion in 2012 to $912 billion.
- Emerging Europe and Asia account for most of the decline.
- A recovery in capital flows to just under $1 trillion projected for 2013.
- Euro Area crisis still seen as largest downside risk.
Copenhagen, Denmark, June 7, 2012 — The Institute of International Finance released new forecasts for net private capital flows to emerging markets showing a projected overall total of $912 billion for 2012, down from an estimated $1,030 billion in 2011. The Institute projects a recovery in flows in 2013 to just below $1 trillion, on the back of a gradual improvement in the global growth outlook.
IIF Deputy Managing Director and Chief Economist Philip Suttle said, “The outlook for capital flows is subject to unusually large downside risks, most particularly the uncertainties in the Euro Area. We anticipate that economic and financial tensions in the Euro Area will persist for some time and subside only very gradually in 2013.”
The IIF, the leading global association of financial services firms with over 450 member institutions worldwide, noted that capital flows recovered in the early part of 2012, reversing some of the extreme weakness seen in the second half of 2011. As a result, the Institute revised upwards its forecast of last January that suggested that 2012 flows would total $746 billion.
Mr. Suttle noted, “Despite the large upward revision, capital flows this year are still projected to decline in Asia (by around 15%), in particular China. As the largest recipient country, China is especially dependent on swings in global financial market sentiment. In addition, past appreciations of China’s currency are set to dampen foreign investor demand going forward. On the back of a continued fall in FDI inflows to China, capital inflows to Asia are projected to decline also in 2013. This projection partly reflects our expectation of some slowing in the rapid build-up of manufacturing capacity.”
The share of Emerging Asia in total private capital flows to emerging markets is set to edge down from 52% in 2011 to 44% in 2013. Private capital flows to this region are likely to be around $450 billion this year and $440 billion in 2013, down from around $530 billion in the previous two years. The IIF noted that deleveraging by European banks, and the recurrent global turmoil brought on by the crisis in the Euro Area, are contributing to periodic bouts of risk aversion and pullbacks from equity and bond markets in this region. Nevertheless, the relatively strong regional fundamentals, search for yields and liberalization of capital accounts are providing support to capital flows.
Significant bank deleveraging in the Euro Area is a major cause for a slowing of net private capital flows into Central and Eastern Europe (notably the Czech Republic, Poland and Russia). For 2012, capital inflows are now expected to fall by around 20% to $145bn, but a recovery of flows to $203bn is seen as likely for 2013.
Net private capital inflows to Latin America are projected to remain around $250 billion in 2012, broadly unchanged from last year. Today’s report noted that the overall stability of capital inflows, nonetheless, masks three underlying developments: 1) a moderate decline in net inflows by commercial banks consistent with ongoing deleveraging in Europe; (2) a modest rebound of portfolio equity inflows, and (3) robust net foreign direct investment (FDI).
The IIF said net private capital inflows are likely to strengthen to over $270 billion in 2013. FDI remains the main driver despite a worsening investment climate in Argentina. China has gained prominence as a major source of investment in Latin America, with the bulk of its investments aimed at securing access to natural resources, but Chinese flows of capital have also gone into manufacturers (auto- and steelmakers) to tap into large domestic markets by setting up local plants (Brazil).
Net private capital flows to the seven countries constituting Emerging Africa and the Middle East in the IIF sample are estimated to have been $58 billion in 2011, $41 billion lower than in 2010. This sharp fall is explained by the political turmoil in Egypt, which led to a shift from a net private capital inflow position of $21.5 billion in 2010 to a net outflow position of $3.5 billion in 2011, and the end of the foreign investment cycle in the energy sector in Saudi Arabia. The IIF now projects private inflows for the seven countries in its sample to rise gradually to $62 billion in 2012 and $79 billion in 2013, still well below the levels reached in each of the years between 2006 and 2008.
Emily Vogl, Frank Vogl