Capital Flows to Emerging Markets - The Perspective from the IIF Felix Huefner Global Macroeconomic Analysis Department Institute of International Finance 1 st Meeting of the COMCEC Financial Cooperation Working Group December 12, 213, Ankara
IIF Capital Flows In A Nutshell Country Sample Emerging Europe Emerging Asia LatAm Africa/M. East Bulgaria China Argentina Egypt Czech Republic India Brazil Lebanon Hungary Indonesia Chile Morocco Poland Malaysia Colombia Nigeria Romania Philippines Ecuador Saudi Arabia Russia South Korea Mexico South Africa Turkey Thailand Peru UAE Ukraine Venezuela Data in Annual frequency starting in 1978. 2
IIF Capital Flows: What and Where? Emerging Market Private Capital Inflows, Net $ billion $ billion 1,4 1,2 1, 8 Commercial Banks Nonbanks Portfolio Equity Direct Equity Investment 1,4 1,2 1, 8 China EM Asia ex. China MENA Latin America 6 6 EM Europe 4 4 2 2-2 1995 1998 21 24 27 21 213 Source: IIF -2 1995 1998 21 24 27 21 213 Source: IIF 3
Inflows vs. Outflows EM Capital Flows by Residency of Investors $ billion Total Capital Inflows % of GDP, net flows from non-residents 1,5 1, "Private" Resident Outflows Official Reserve Accumulation Non-Resident Inflows 25 2 Emerging Economies 5 Net Flows 15 Mature Economies -5 1-1, 5-1,5-2, 1995 1998 21 24 27 21-5 1988 1992 1996 2 24 28 212 Source: IIF Sources: IIF, IMF Balance of Payment Statistics, IMF WEO October 213. Note: Mature = 5 major economies. 4
Twenty Years of Thrills and Spills Total Inward Flows, IIF EM 3 percent of World GDP 3.5 3. 2.5 2. 1.5 1..5 Total, % of World GDP Total, $ Billion (rhs) Tequila Crisis Asia Crisis Argentina Crisis Global Fin. Crisis QE 2 Taper Tantrum $ billion 14 12 1 8 6 4 2. 199 1994 1998 22 26 21 Sources: IIF, IMF Balance of Payments Statistics 5
The Past: Push- and Pull Factors Were Supportive Real GDP Growth Rate % y/y % of GDP 8 6 45 4 35 G3 Central Bank Balance Sheets 4 2-2 Mature Economies -4 Emerging Economies -6 1988 1992 1996 2 24 28 212 Source: IIF, Datastream. 3 25 2 15 1 U.S. Euro Area 5 Japan 27 28 29 21 211 212 213 Source: National Sources, Datastream.
Boosting Capital Inflows to EM Emerging Market Private Capital Inflows, Net $ billion 1,4 1,2 1, AFME Latin America EM Europe Equity and Bond Flows into EM Funds Around Fed QE Episodes $ billion; t= are starting dates for QE implementation 1 5 8 6 4 2-2 EM Asia 22 24 26 28 21 212-5 QE1 QE2-1 Operation Twist Operation Twist Extension QE3-15 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 Source: IIF Capital Flow Report January 213 Source: IIF
Now: EMs Disappoint While MEs Surprise Index, 5=breakeven 6 Manufacturing PMIs 1 IIF GDP Growth Forecasts for 213 forecasts as of Nov 213 55 8 PH CN 5 45 Advanced Economies 4 Emerging Economies 35 3 28 28 29 21 211 212 213 Source: Bloomberg, Markit Economics, IIF HU 6 4 2-1 1 3 5 7 9 Source: IIF AR RO PL RU SA KR ZA BR MX ID CL IN TR TH MY forecasts as of Dec 212 8
Capital Flow Retrenchment During the Summer $ billion 4 Net Inflows into EM Funds Current Accounts and Exchange Rates 5 KR CA in % of GDP PL CN RO -7-5 -3-1 1 3 HU 5 7 2-2 Bond Equity CL ZA TR Fragile Five IN PE MX -5 TH -1 BR ID -15 PH RU MY Unchanged Monetary Policy Stance Monetary Tightening Monetary Easing -4 29 21 211 212 213 Source: EPFR -2 FX change between May 23 and September 5 Sources: Datastream, IIF, National Sources. Note: CAB figures reference 212 yearly data. Monetary tightening includes both policy rate hikes and tightening of liquidity conditions. 9
Impacting Lending Conditions EM Bank Lending Conditions Index Diffusion index (5=neutral) 6 Funding Conditions Tightened Diffusion index (5=neutral) 7 Credit Standards 55 6 Loan Demand Funding Conditions 5 5 45 4 4 21 211 212 213 3 Jan 1 Jan 11 Jan 12 Jan 13 Source: IIF EM Bank Lending Conditions Survey. Source: IIF EM Bank Lending Conditions Survey. 1
Retrenchment Episodes in Perspective EM Equity and Bond Fund Flows Major EMs: Non-Resident Capital Inflows cumulative flows, t= month before retrenchment began $ billion, Major EMs= BRIC, Turkey, Mexico & Indonesia 15 1 t= 5/1/28 t= 8/1/211 25 2 IIF Forecast 5 t= 4/1/213 15 1-5 5-1 -15-5 -2 t-2 t-12 t-4 t t+4 t+12 t+2 Sources: IIF, EPFR -1 25Q1 27Q1 29Q1 211Q1 213Q1 Sources: IIF, IMF Balance of Payment Statistics, SAFE 11
EM Differentiation: The Ones That Benefit EM Exposure to G3 Demand Manufacturing exports as % of total exports Asian Exports and G3 PMIs percent, 3m/3m saar 5=breakeven 1 China 4 Asia Exports 6 Philippines South Korea 3 G3 Manufacturing PMI 5 India Turkey Mexico Thailand Malaysia South Africa Poland 2 1 55 Indonesia 5 Chile Russia Exports to G3 as % of total exports 2 4 6-1 -2 21 211 212 213 45 Source: WTO Source: Datastream, IIF. Note: Asia exports is a weighted avg. of Korea and Singapore. PMI is weighted average of U.S., Euro Area and Japan.
EM Portfolio Inflows Should Persist 5 4 3 2 1-1 -2-3 percentage points Global GDP Growth Emerging Markets Mature Economies 1992 1995 1998 21 24 27 21 213f percent of world GDP Total Capital Inflows to EMs 9 8 7 6 5 4 3 2 1 1994 1998 22 26 21 214f Source: IIF Capital Flows Report October 213 Source: IIF Capital Flows Report October 213
EM Portfolio Inflows Should Persist Cumulative Equity/Bond Flows into EM Funds $ billion, trend estimated with HP filter, EPFR data Financial Globalization and Deepening (22-212) total financial assets in % of GDP 35 3 25 Bonds Equities Equity Trend 5 4 2 Bond Trend 15 1 5-5 23 25 27 29 211 3 2 1 Brazil China India Russia Euro Area United States Japan 1 2 3 4 5 (foreign assets + foreign liabilities) / GDP Source: IIF Capital Flows Report October 213 Source: IIF Capital Flows Report October 213
Thank You See our reports on www.iif.com: Capital Flows to Emerging Market Economies, Oct. 213 Structural Challenges to EM Growth, October 213 EM Bank Lending Conditions Survey, October 213 15 15