capital flows

Source: IIF

Capital flows to emerging markets fell sharply in 2014 and will fall again in 2015 before a modest recovery in 2016, according to estimates by the Institute of International Finance in a report to be published on Thursday. Read more

And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.

Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class. Read more

Source: Reuters

The recent turmoil in emerging markets has hit India, reversing some of the the gains and optimism from the end of last year.

Early on Tuesday, the benchmark Sensex index was down 0.7 per cent to 20,062.48 in Mumbai, adding to significant losses in the last session and hovering around the psychological threshold of 20,000. That a level not seen since last October, although it has since recovered to be flat on the day.

It’s both global factors as well as news from home that are dragging India’s markets lower. Read more

If the US tapering its QE programme, or the widespread protests of mid-2013 weren’t enough to give investors an excuse to sell out of Turkey, what of the current political scandal? Surely the entrenched crisis provoked by the confrontation between Prime Minister Recep Tayyip Erdogan and the police, prosecutors and judges has undermined confidence in the country?

Perhaps not. Analysts at Nomura have looked at the numbers, and it seems investors are largely staying put. Read more

By Fernando Losada of AllianceBernstein

Since May, over a quarter of the past five months’ foreign portfolio investment into emerging markets has been withdrawn, according to the latest available data from EPFR. For the Latin American economies, this is likely to result in slower growth, but the impact may be milder this time around. Read more

By Timothy Ash of Standard Bank

Russia’s finance ministry has claimed that net private capital outflows may stop in 2014. It is interesting that the ministry should be pushing this idea just as a guilty verdict has been handed down to Alexei Navalny.

I would hazard a guess that negative global headlines on this kind of case will likely subdue foreign inflows and encourage Russians to stash more of their money overseas. Read more

James Tobin

South Korean government officials are flirting again with the idea of introducing taxes on financial transactions to curb rapid capital flows in and out of Asia’s fourth-largest economy.

Eun Sung-soo, director general at the finance ministry, told reporters on Wednesday that the government was considering “various” financial taxes to reduce volatility in capital flows and could strengthen existing capital control measures, if needed. Read more

Watch out for the Fed tightening. That’s the message from the Institute of International Finance, the bankers’ club, to investors ploughing funds into emerging markets.

Speaking in Switzerland on his way to the World Economic Forum in Davos, IIF managing director Charles Dallara warned that investors had “underanticipated” sudden turns in monetary policy in the past – and might do so again. He said: “Are we adequately risk aware? Are we adequately risk sensitive?… I am not at all sure that we are.” Read more

Worried about capital flight from Russia? Don’t be, says Renaissance Capital. Net outflows, the bane of the Russian economy for years, are dropping, and could turn into a (small) net surplus for 2013, given improving prospects for the global and Russian economy.

Fair enough. But that will still leave Russia far adrift of other emerging markets in terms of attracting foreign money. Investors will want to see radical shifts in the economic plans of the new Putin presidency before they even consider a rethink. Read more

Huge capital outflows have been a glaringly visible sign of Russian business people’s distrust of president Vladimir Putin’s rule. Worried about corruption, property rights and the rule of law, the rich have been funneling their money abroad. Right?

Wrong, actually. So says a study published this week which argues that Russian outflows are only half as big as officially reported, due to peculiarities in Russia’s statistics. The new analysis won’t be the last word on a complex subject – but it’s already prompted Russian officials to consider taking another look at the numbers. Read more

Asian markets were down on Wednesday as investors judged that the recent liquidity announcement from the US Fed, the European Central Bank and the Bank of Japan may not stimulate economic growth as much as previous rounds of quantitative easing.

As Barclays Bank argues in a report, the central bank moves have improved sentiment by reducing risk, especially in Europe, and should be good for emerging markets. Ride the tide, the bank tells clients. But it’s very cautious about the economic outlook. So investors who climb on this particular surfboard had better watch out. Read more

By Leif Eskesen of HSBC

The Asean-5 economies – Indonesia, Malaysia, Thailand, the Philippines and Vietnam – recovered very rapidly from the global financial crisis in 2008-09 on the back of sound economic fundamentals and a heavy and well-targeted dose of monetary and fiscal stimulus.

However, except for Vietnam, the recovery was aided by strong capital inflows that poured into the region following the crisis. The attraction was that these countries offered far better growth and interest rates than were available in the West. Moreover, exceptionally loose monetary policies in these advanced economies pushed capital flows into the region. Read more

In 2009, G20 leaders proclaimed: “The era of banking secrecy is over.” They pledged to close down secrecy jurisdictions that enabled banks to take risks off their balance sheets and allowed wealthy companies and individuals to evade tax.

It was an empty pledge, according to a weekend report by former McKinsey chief economist James Henry, and it is costing emerging market governments a lot of money. Read more

After robust inflows in the first quarter of 2012, foreign institutional investors have pulled money out of India in April, to the tune of $105.4m.

By comparison, January, February and March saw inflows of $2.04bn, $5.13bn and $1.68bn, respectively. That combined $8.54bn helped save the fiscal year ending in March from being a total wash-out, bringing FII inflows up to $9bn after a disastrous 2011 for the Indian economy (one whose repercussions were felt in S&P’s outlook downgrade on Wednesday). Read more

By Victor Shih of Northwestern University

In the latest PBOC data release, Chinese banks, including the central bank, bought Rmb140bn worth of foreign currency in January. The increase of “position for foreign exchange purchase” in banks suggests that foreign exchange once again flowed into China, in contrast to the last three months of last year, when FX flowed out of China.

Some analysts interpret this as a return to business as usual as confidence returns to the renminbi. Yet is this the whole picture? Read more

By Manoj Pradhan

Emerging market economies cannot decouple. More importantly, they shouldn’t try to if they want to protect growth. Wondering whether EM economies will decouple is surely pointless when we say in the same breath that markets are rapidly becoming more internationally integrated.

What has changed, however, is the origin and nature of EM crises. Ironically, it is the very success of EM economies in attracting capital inflows and lending from global banks that exposes them to the risk of a sudden shocks should these inflows slow down dramatically, or even reverse. Read more

When the US sneezes, Latin America catches a cold – or so the saying goes.

But you wouldn’t know that looking at the LatAm debt market. Bimbo, the the world’s largest breadmaker, became the latest to join the LatAm 2012 bond bonanza with a 10-year debt sale. Read more

India’s trade deficit widened to a 17 year high of $19.6bn in October, according to Rahul Khullar, the country’s commerce secretary.

The record number highlights the underlying problems in India’s economy and represents a dilemma for the Indian central bank, already struggling with inflation, that might force it into another rate hike in the future. Read more

A sharp reminder of the vulnerability of central and eastern Europe to shifts in short-term capital flows comes in a report from UniCredit.

While it doesn’t mention Greece,  it is, in effect, all about Greece as it is looking at which countries could be most vulnerable to sudden capital outflows. Compared to the last crisis in the region in 2008/9,  Russia, Kazkhstan, Latvia and the Czech Republic are in a better position to cope. But Ukraine, Turkey and Poland are worse off. Read more

By Grant Chum of UBS

You might expect Hong Kong to be delighted with its central role in the internationalisation of the renminbi.  The metrics have indeed been impressive: since mid-2010 RMB deposits have grown five-fold, to about 8 per cent of Hong Kong’s deposit base; monthly RMB trade settlements in the city have grown 13-fold over the same period and account for almost 90 per cent of China’s cross-border RMB trade settlements; the so-called dim-sum bond market has gone from zero to a US$15bn market in less than a year.

Yet it is also increasingly apparent that the rapid development of an offshore RMB market also poses an insidious threat to the stability of Hong Kong’s financial economy and its cherished peg to the US dollar. Read more