IIF sees drop in capital flows to emerging economies

Private capital flows to emerging economies are poised to slow significantly next year after taking a hit from US plans to taper monetary stimulus, according to a report released Monday. The Institute of International Finance, representing the world's largest banks, said that global economic and financial conditions have become less supportive of capital inflows to emerging-market economies. Capital inflows were projected to drop to $1.062 trillion in 2013 and to $1.029 trillion in 2014, from $1.145 trillion in 2012, the IIF said in its latest Capital Flows Report, based on a study of 30 emerging market (EM) economies. Compared with its June report, the annual forecasts were down about $80 billion for both years. For the emerging economies, "a period of rapid credit-fueled growth over the past years has come to a definitive end," the report said. Robust capital inflows to emerging economies abruptly reversed course this year after the Federal Reserve signaled in May it would reduce its $85 billion a month in asset purchases this year if US economic conditions could support the move. The prospect of a tighter money supply pushed US interest rates higher, and came amid concerns about the vigor of growth in emerging economies. "The continuing concerns over the normalization of monetary policy by the Fed together with a less positive assessment of emerging-market growth prospects are causing investors to be more cautious," Charles Collyns, the IIF's managing director and chief economist, said in a statement. "Nevertheless, we are projecting a gradual recovery in flows, barring any major shifts in the markets' views on likely Fed actions. While capital inflows will be less buoyant than in recent years, emerging markets should continue to benefit from higher growth compared to advanced economies and further financial market development." The IIF, which represents more than 470 financial institutions worldwide, cautioned that the outlook for capital flows beyond the next few months was particularly dependent on investor perceptions of prospects for more robust growth in emerging markets. Many equity analysts, it said, had cited underlying concerns about growth prospects, notably a "hard landing" in China's efforts to control its fast-growing economy and continued subpar growth in developed markets, which have knock-on effects on commodity exporters. "Against this backdrop, the Fed has in essence provided more time for EM policymakers to make progress on much-needed but unfinished structural reforms," the report said. "Hence, both growth prospects and investor perceptions will hinge in large part on the ability of EM policymakers to deliver on these reforms." Beginning with this report, the IIF said, it will publish quarterly forecasts for the capital inflows to the seven largest recipients of foreign capital: China, Brazil, India, Russia, Mexico, Turkey and Indonesia.