Capital Flows’ Strange Subdued Spirit
The IIF bid farewell to its longtime managing director as it lifted the early year $750 billion emerging market capital inflow estimate 20 percent to over $900 billion in still “subdued and subject to unusually large downside” conditions. The ECB massive liquidity operation temporarily helped sentiment but “mood swings” have reversed with crisis spread and universe pivot China, which accounted for the bulk of the higher projection, also feeding mixed growth, currency and investment expectations. Latin America was the other marginally upgraded region, while Europe and the Middle East/Africa both stayed flat. Annual ambivalence is reflected in recent fund-tracking data showing across-the-board asset class exit despite the relatively unchanged 5 percent GDP growth forecast and government debt levels. A disorderly Greek euro departure would have “severe repercussions” as money was stashed in safe havens and an external funding squeeze hit Central Europe. FDI will be off $25 billion from 2011 at $500 billion and mainly target services, which now outstrips manufacturing and natural resources for the 30 countries covered. Net portfolio equity will triple from last year’s dismal $20 billion as p/e ratios are in line with historical trends, while commercial bank lending will halve to $75 billion on global deleveraging and capital replenishment prods. Bond commitments at $275 billion are off from previous records but the yield pickup over G-3 instruments sustains the pipeline. Official assistance from the IMF and bilateral sources is put at $50 billion for 2012 and 2013 chiefly directed to Europe’s periphery. Outstanding Fund credit was over $150 billion as of the Camp David summit decision to raise future capacity to almost $1 trillion, with Greece, Ireland and Portugal taking half the amount followed by Romania, Ukraine and Hungary.
China, which subscribed to the increase, however will experience a one-third inward private capital fall to $200 billion as the debt-creating portion dips to $75 billion. Despite foreign investor opening as with the more than doubling of the QFII quota to $80 billion and expansion of the investment bank and brokerage local ownership limit to 49 percent, economic growth will “slip” to 8 percent on a diminished trade surplus and profit and remittance current account stream as the currency likewise weakens against the dollar in the coming months going into leadership transitions in Beijing and Washington. India is confronted by its own balance of payments “travails” according to the association, and the central bank will continue to draw on its $300 billion reserve pile for rupee support. Turkey’s inflows have been stable but come in part from volatile unidentified channels to bridge its “outsize” external deficit. In Latin America Argentina and Venezuela are notorious for “anti-business policies” and in the Mideast Egypt’s $25 billion in financing needs through next year will be a multiple of the $3 billion IMF facility that the new government may pursue along with easier non-resident equity access to redirect fervor.
