Emerging Markets Face Longest Withdrawals Of Funds

Emerging Markets Face Longest Withdrawals Of Funds

The longest streak of withdrawals by foreign investors from emerging markets has lasted five months, underscoring the impact recession fears and rising interest rates are having on developing economies.

According to preliminary data published by the Institute of International Finance, cross-border withdrawals by foreign investors in EM equities and local bonds reached $10.5 billion this month. The amount of net withdrawals over the last five months has exceeded $38 billion, marking the greatest stretch of time since records have been kept in 2005.

The withdrawals run the risk of escalating a growing financial crisis in developing economies. Bangladesh and Pakistan have asked the IMF for assistance, while Sri Lanka has defaulted on its national debt over the previous three months. Additionally, an increasing number of other issuers in emerging markets face risk.

Worst is over for Emerging Markets

However, the Institute of International Finance believes the worst is over for the EM.

“Our tracking of flows captures primarily transactions on the secondary market, i.e. the buying and selling of stocks and bonds that have already been issued.

“We examine separately what is going on in primary issuance of hard currency securities. Net issuance has also gone negative in recent months (Exhibit 5) and – looking at regions – remains positive only for large oil exporters in the Middle East (Exhibit 6 – above).

“We think this retrenchment in flows – both on the secondary market and in primary issuance – stems from the Fed’s hawkish shift in June, which now – thankfully – sets the stage for relief across emerging markets as the Fed approaches “neutral,” reducing somewhat the urgency to hike,” it says.

We therefore expect the worst of the EM sell-off to be behind us and believe a period of consolidation is in store for EM.