Fears of an emerging markets credit crunch that would wipe out many of the gains made by developing countries over the past decade are set to escalate this week as senior politicians, bankers and investors fly into Lima for the annual World Bank/IMF meetings.
Leading figures have warned that emerging markets are facing a nervous future, as capital flows decelerate precipitously or reverse entirely, leaving once-vibrant major economies struggling for cash and effective policy responses.
The Institute of International Finance said that capital flows to emerging markets had “weakened sharply” in recent months, with non-resident inflows set to fall this year to below 2008 levels.
Commercial banks will pull assets out of all emerging market regions this year, the IIF predicted, with $165bn being repatriated from emerging Asian nations alone, on growing fears of a bumpy economic landing in China.
“We now expect that net capital flows to emerging markets in 2015 will be negative for the first time since 1988,” the IIF warned. Its chief economist Charles Collyns said that emerging markets were facing a “sustained period of capital outflows and increasingly difficult financial conditions”.
Jennifer Elliott, deputy division chief at the IMF’s monetary and capital markets department, pointed to concerns over deteriorating credit quality in developing nations, as well as a “coming and worrying uptick in non-performing loans”.
A move toward higher interest rates in the months ahead in the United States will only exacerbate problems, she added, with “tightening financial conditions having a further [negative] impact on emerging markets. This is a concern that is growing.”
DEFICIT DANGERS
The IIF said the emerging markets most in jeopardy from a credit crunch were those weighed down by “current account deficits, questionable macro policy frameworks, large corporate FX liabilities, and acute political uncertainties. Brazil and Turkey combine these features.”
This rising sense of emerging market crisis is amplified by rising concern about the true health of China’s economy, and the government’s policy responses. José Viñals, head of financial stability at the IMF, said China faced “unprecedented challenges” in its attempts to transition to a more market-based system, a process that would, he said, lead to “corporate defaults and more write-offs of NPLs in order to strengthen the banking system”.
A record $142bn in portfolio capital exited China in August, following a double devaluation of the renminbi, a jagged reaction to the bursting of a stock market bubble and rising fears over its economy. The record was set only the previous month, when $125bn fled the country in search of safer havens.
Even India, described as one of the few “bright spots” in the global economy by IMF managing director Christine Lagarde, is struggling to make its case to global institutional investors fearful of putting capital to work in the emerging world.
The IMF tips India’s economy to grow by 7.3% in 2015, yet foreign institutional investors (FIIs), the backbone of the country’s stock markets, have withdrawn funds from India in four of the past five months, with net FII outflows hitting $3bn in August and $1.7bn in September.
“Given what is happening right now in China and Brazil, emerging market investors are concerned,” said S. Subramanian, head of investment banking at Mumbai-based Axis Capital. “Investors ask about India’s underlying credit, but we are being bracketed alongside other, more stigmatised emerging markets.
“So however much I’d like to believe that India offers a better story, we are being sucked into the wider theme: that emerging markets are in trouble. India may be growing, but global investors aren’t going to make an exception of us.”