Unlike in 2008-09, when capital flows to emerging markets plunged abruptly as a result of the USA sub-prime mortgage crisis, the IIF’s analysts say the current reversal is the latest wave of a homegrown downturn.
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Non-resident investors in EM securities will have sold an estimated net $40bn worth of assets during the quarter ending on September 30, divided roughly evenly between bonds ($21bn) and equities ($19bn), according to the IIF. That is equivalent to just 2 per cent of developing countries’ gross domestic product, down from a high of nearly 8pc in 2007, the global finance industry body said.
Higher capital outflows in many countries have exerted pressure on local currencies, exacerbating worries for a few investors who are now nursing losses on both the underlying asset and the local currency.
Indebtedness at non-financial corporations in EMs had incersed more than fivefold over the past decade to reach $23.7trn.
So, which region is the weakest?
Mohamed El-Erian, economic advisor to Allianz, responding to the data, described emerging markets as “completely unhinged”, and warned that USA growth may not be enough to rescue the global economy. Emerging market firms now boast a record $18 trillion of debt, with the largest increases in leverage in highly vulnerable sectors, such as construction, mining and oil, the International Monetary Fund said.
The investor sell off represents the largest reversal since the fourth quarter of 2008, the height of the financial crisis, when emerging markets saw $105 billion in outflows, the IIF said.
The IIF staunchly disagrees, however.
“The factors holding back flows wilbe persistent, implying a protracted drought rather than qick relief”.
“(The) decline has been driven by a sustained slowdown in EM growth, and in particular by uncertainty about China’s economy amid continuing concerns about the impact of the Fed’s eventual turn to raise United States interest rates”, the IIF said.
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Global investors will suck capital out of emerging economies this year for the first time since 1988, as they brace themselves for a Chinese crash, according to the Institute of worldwide Finance.
