Paris, France, June 26, 2013 - Net capital inflows to emerging economies have seen a retrenchment in recent months and are forecast to decline this year and next. The Institute of International Finance (IIF) projects that net private capital inflows to emerging economies will fall by $36 billion to $1,145 billion in 2013, before declining another $33 billion in 2014 (Chart 1 and Table 1, below). Hung Tran, IIF Executive Managing Director, noted that"investors have become increasingly concerned about the market impact of the Fed's exit from accommodative monetary conditions, particularly against the backdrop of slower growth in key emerging economies.A further rise in global interest rates would also present challenges for EM policymakers-particularly in countries facing the aftermath of a long period of strong credit growth."

1. Emerging market equities are down almost 15% since May 22 and have underperformed their mature market counterparts by more than 20% year-to-date.This sharp divergence in equity market performance underscores the high degree of uncertainty surrounding EM growth and corporate earnings forecasts-and the challenges for EM policymakers during this period of transition.
2. The need to unwind the unprecedented monetary expansion will pose formidable challenges for the Fed (and ultimately other major central banks) over the next several years. Global monetary policy settings are an important driver of capital flows andemerging markets tend to be affected disproportionately because foreign capital movements can be very large relative to their domestic financial markets.
3. Countries with large external financing needs are particularly exposed to a potential retrenchment of foreign capital flows. In addition, tail risks associated with an adverse market reaction to the anticipated unwinding of monetary support are unusually large.
4. While some emerging economies continue to depend heavily on external financing, others are important net capital exporters.These countries include several major oil exporters (such as Saudi Arabia, UAE, and Russia) as well as China and Korea.
5. In recent years, there has been an important rotation in the composition of capital exports from emerging markets. Until the mid-2000s, the lion's share of EM capital exports from was in the form of official reserve accumulation. In the last few years, however, private (non-reserve)capital outflows have surged in a number of key emerging market economies, including China.Net private capital outflows are projected to reach $1 trillion in 2013, having averaged just $103 billion in 2000-2003."