ECONOMIC UPDATE: Constructive flows to EMs but headwind prospers
Recovery in EM growth spurs portfolio flows
In contrast to a sharp decline in capital flows to emerging markets between 2015 and 2016, portfolio flows proved resilient in 2017. The Institute of International Finance (IIF), estimated portfolio inflows to EMs over 2017 at $243 billion (+40%% YoY)— the highest level since 2014— underpinned by broader global economic recovery, higher risk appetite and favourable global financial conditions. On the pull side, higher commodity prices and
improving economic fundamentals which lessened default risk as well as a more stable currency market were key drivers for the strong portfolio flows.
Importantly, despite rate hikes by global central banks, flows to EMs debt was boosted by significant interest differentials with DMs which incentivised carry trade opportunities.Examining trends in asset classes, IIF estimates EMs debt flows at $183 billion (+63.4% YoY) while portfolio flows to equity was projected to moderately contract by 3% to $60 billion. On the supply side of debt flows, rise in government spending across most EM countries underpinned the ramp up in domestic and external debt issuances.
Whereas, concerns over fragile economic recovery, political and policy risk in key EM countries continued to trump portfolio flows into equity. In summary, the ripple effect of improving growth picture in major EM economies and higher commodity prices sustained positive FPI flows over H2 2017 ($81.7billion). Subsequently, we delineate how the interplay between pull and push factors shaped FPI flows across key EM geographies.
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