Capital Flows’ Choppy Chamber Check
The IIF’s early 2014 capital flows model projected a flat $1.1 trillion result due to “choppy conditions” lasting beyond January’s correction on risk aversion and external financing and political cross-currents illustrated in the extreme Argentina, Ukraine and Turkey cases. Average GDP growth should improve to 5 percent, but will be outweighed by lower debt allocation following the Federal Reserve’s Treasury purchase petering. The group points out that broader trends may not be reflected in retail-driven real-time fund data showing outflows whereas country balance of payments figures better capturing institutional appetite were $80 billion positive during the May-October initial scare last year. FDI will remain half the total, and portfolio equity should rise marginally to $100 billion on record single-digit valuations as combined bank lending and bonds slumps over 10 percent to $415 billion. Official funding should double to $55 billion mainly on Gulf aid to Egypt and other Arab borrowers, as the thirty emerging markets covered stay net creditors due to $1 trillion in private flight and investment abroad and $300 billion in reserve recycling. IMF surveys place China, Chile and Mexico in the top South-South ranks, although direct and portfolio patterns draw on dated and scarce statistics. Frontier markets outside the IIF universe may be “more insulated” with continued securities outperformance, with less than 0.5 correlation to the S&P 500 promoting stock diversification. However many members have high budget and current account deficits including Ghana, Lebanon and Serbia and cross-border banking flows have yet to fully rebound from European retreat although Japanese rivals have stepped into the breach. Asia again will take half of private capital, with Chinese FDI at $250 billion with Shanghai’s free trade and currency openings under the new leadership agenda. India should get $75 billion following the surge in non-resident deposits under a special scheme, while Indonesia’s grab is estimated at $40 billion, about the same as in 2013, due to “policy uncertainty” in the hydrocarbon and mining sectors. Household debt in ASEAN and Korea may be a deterrent as bank caution increases in Central Europe, Russia and Turkey as well on credit overextension. Russia’s bailout may not last though this year in Ukraine in the absence of reform and political settlement, and Turkey’s steep monetary tightening will hurt private borrowers more than the sovereign, according to the update.
In Latin America, Argentina and Venezuela will continue as pariahs with their “deep imbalances and draconian controls,” while Andean engagement stays solid and Mexico vies with Brazil for foreign investor preference, with the latter regaining popularity with inflow restriction removal heading into elections. The Middle East and Africa will be “broadly unchanged” as Egypt obtains further bilateral assistance from the Gulf and non-residents pare South African fixed-income positions despite ample appetite for maiden sovereign issues. Kenya, Angola and Uganda may soon join the parade cheered on from “rarity and natural resource wealth,” the organization believes.
