The emerging markets’ (EM) total non-resident inflows are projected to slow considerably in 2020, the Institute of International Finance (IIF) said in a recent report. The slump will be driven by the coronavirus (COVID-19) shock to global growth and risk sentiment, as well as the fall in commodity prices.
It forecast that non-resident flows will reach $444bn, significantly lower than the $937bn last year, with 2020 seeing weaker flows than either the global financial crisis in 2008 or the China shock in 2015.
The IIF expected total EM foreign investments, excluding China, to come in at $304bn, the lowest since 2004.
“In terms of the composition, we expect foreign direct investment (FDI) in EM excluding China to hold up better, but still fall relative to 2019 levels due to excess capacity of $294bn, while portfolio investment for the year will likely be negative at -$41bn due to the risk-averse sentiment in H1 of 2020,” the report said.
The IIF said the combination of the global coronavirus pandemic and a substantial drop in oil prices led to outflows of around $83bn in March alone. In the year to date, the IIF’s high-frequency tracker shows portfolio equity outflows of $72bn and debt outflows of $25bn.
The institute`s base scenario assumes that non-resident portfolio flows will begin to recover in H2 in 2020 as countries emerge from coronavirus-related shutdowns and benefit from accommodative monetary policy in G-3 countries.
However, it projected the non-resident portfolio flows to EM, excluding China, to remain negative for the whole year. The collapse in equity flows is expected to be broad-based, with all regions except Africa and the Middle East experiencing sizable outflows.
The IIF mentioned that as a result of the sudden stop in capital flows, most emerging markets will not be able to run significant current account deficits, and will have to draw down reserves. At the same time, commodity exporters will be severely affected by the decline in oil prices.