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Net Private Capital Flows to Emerging Markets Set For Modest Decline in 2012
Monetary Easing to Encourage Higher Capital Flows in 2013
Tokyo, Japan, October 13, 2012 — The IIF today released in Tokyo the October edition of its Capital Flows to Emerging Market Economies report, in which private flows to Emerging Markets are forecast to reach $1,026 billion in 2012, rising modestly to $1,100 billion in 2013. This represents an upward revision of the forecasts made in the last Capital Flows report (in June this year) of $114 billion and $106 billion respectively; but total private flows nevertheless remain significantly lower than their historic high of 2007, when they reached $1,236 billion.
Aggressive easing by the U.S. Federal Reserve, through its commitment to purchase $40 billion of mortgage-backed securities a month until the labor market improves significantly, and the announcement of the European Central Bank’s Outright Monetary Transactions’ (OMT) program, should provide support to capital flows to Emerging Markets. The report finds that significant tail risks to the global economic outlook have receded recently, mainly due to lower Euro Area-related risks following the ECB’s announcement of its OMT program.
Mr. Felix Huefner, Deputy Director of Global Macroeconomic Analysis of the IIF, highlighted the fact that “debt flows have evolved better so far in 2012 than we projected in our June report, due to lower risk aversion and the general improvement in financial market conditions since the summer months. However, we still expect total flows to fall in 2012 relative to 2011 because bank deleveraging, notably in Europe, has weighed on bank lending flows.”
Mr. Philip Suttle, Deputy Managing Director and Chief Economist of the IIF, commented: “The 2013 forecasts reflect a balance of two opposing factors – a weaker global growth environment, countered by more monetary stimulus. On balance, we project the first increase in private capital flows to emerging economies since 2010. Moreover, after falling by around $10 billion this year relative to 2011, flows of foreign direct investments are forecast to rise by more than $20 billion in 2013, to reach $536 billion – close to the historical high reached in 2008.”
When expressed as a percentage of emerging market GDP, it is clear that net private capital flows are still relatively modest, by historic standards. In 2007, when such flows as a percentage of emerging market GDP peaked at 8.5%, that coincided with the period of maximum leverage in mature economies. The percentage for the period 2012-13 is much lower, at 4.1%, in line with the relative scale of net flows during 1992-2004.