IIF Capital Flows Tracker: Flows Cooling Down

By Jonathan Fortun, Economist, jfortun@iif.com, @EconChar

We estimate that EM securities attracted around $15.6 bn in November 2021 (Exhibit 1).1 Large devaluation of EM currencies and the expectation of a Fed tightening cycle earlier than expected affected the flows dynamic The last portion of the month has also seen weakening flows due to growing fears of a new virus variant. Overall, we see EM investors being more selective and risk-sensitive moving forward.

Moreover, inflation is forcing the hand of policymakers across the EM landscape. Consequently, our tracker shows bond flows starting to diminish, as 12 of 20 major EM central banks have tightened monetary policy since May. For Source: IIF November, EM debt attracted only $6.3 bn in inflows, out of which China debt flows account for $4.2 bn. For the case of EM equities, we see inflows of $9.2 bn, with China equities accounting for $5.0 bn.

We see non-China EM in a de facto sudden stop, with the large devaluation of Turkish Lira likely to worsen the picture going forward, given that contagion to the rest of EM is possible. Underlying this overall picture is a lot of differentiation across individual emerging markets. The latest variant of COVID, an acceleration of Fed tapering and large devaluation in Turkey carry additional risks for an already stressed EM flows picture going forward.

Regionally, our data shows gains in EM Asia (inflows of around $10.9 bn), with only marginal gains in Latam and EM Europe, whereas the Africa & Middle East region has seen outflows of $4.3 bn2.