Capital Flows to Emerging Markets
Brighter Outlook
June 5, 2017
runoffathan is being priced in by markets. All else being equal, a USD500 billion decline in Fed Treasury
holdings would be associated with a reduction of over USD50 billion in EM portfolio flows.
CLOUDS LIFTING
The first months of 2017 have seen some potential head-
winds for EM capital flows abate. In particular, efforts by
Chinese policymakers to support growth and ensure RMB
stability ahead of the autumn leadership transition should
mean a less-volatile backdrop. At the same time, concerns
about the impact of an °America First± orientation of U.S.
trade policy have subsidedaat least for the time beingaas
U.S. policymakers focus on the domestic agenda including
healthcare and tax reform. Assuming ongoing improvement
in global and EM growth and a gradual, well-communicated
path of Fed tightening through 2018, we are now a bit more
optimistic on EM capital flows. Total non-resident inflows to
emerging markets should rise over 35% from 2016, reaching
USD970 billion. Our first look at 2018 calls for non-resident
inflows to top USD1 trillionawhich would be the best year
since 2014.
While the single biggest improvement we expect is a sharp
decline in resident capital outflows from China, signs of a
modest pickup in world trade and more stable commodity
prices should underpin some improvement in banking flows
and trade finance as well. South-South flows, particularly in
cross-border banking flows and portfolio debt will make a
growingaif still modestacontribution (See Box 1). We look
for solid non-resident inflows to EM portfolio debt, sup-
ported both by still-attractive valuations and by rising de-
mand from institutional investors (See Box 2).
Notable vulnerabilities remain. Downside risks to portfolio
flows mainly relate to surprises in overall Fed policy, includ-
ing balance sheet reduction (See Box 3). However, prospects
for FDI are also mixed, and our economists highlight a range
of domestic political and policy risks. But on the whole,
2017-18 prospects look better than they did back in January.
Table of Contents
Executive summary .. 1
A brighter outlook for EM capital flows ...... 2
Macro backd
。。。以上简介无排版格式，详细内容请下载查看