The IIF’s Capital Tide Tug
The Institute for International Finance’s new executive team raised this year’s thirty country capital inflow forecast $30 billion from January’s to $1.15 trillion, although 2014’s projected slide is of equal dimension and would be the lowest since 2009. Both “Fed fear” and slacker GDP growth are to blame as reinforcing push and pull factors, with US Treasury buying to taper in the second half and commodity setbacks adding to “limited” domestic demand support. Debt, equity and currencies are off double-digits since May on $25 billion in tracked fund outflows. With output up less than 5 percent on average MSCI universe single-digit p/e ratios are at a wide historic discount to advanced economy companies, but state-owned listing dominance also hurts profitability. Monetary policy normalization could be rocky as foreign money is often large to domestic market size and interest rate shift precedents from a decade and two decades ago illustrate the potential exit toll. Countries with negative international investment positions could be most exposed, including Poland, Turkey and Morocco, the update suggests. In the separate categories both FDI and bond allocation will be softer at roughly half and one-third the totals. Share purchase is set to decline 30 percent to $90 billion, while bank lending will increase slightly to $145 billion. Outward portfolio investment is a recent overlooked positive phenomenon with an estimated $1 trillion now directed “South-South” by private and sovereign wealth sources alongside the traditional foreign reserve recycling. By region Asia’s share has receded from the previous half on lower China and ASEAN direct and securities engagement partially from diversion to Japan under the Abenomics program. The $250 billion combined current account surplus has halved from five years ago, while outbound FDI in the natural resource and other sectors will be $175 billion in 2014. Europe has been helped by the ECB’s liquidity and debt backing but net bank repayment continues outside Russia and Turkey. Ukraine could be most at risk with sustained resident capital flight, a quasi-fixed exchange rate and “inconsistent” policies unless IMF assistance resumes. Hungary and Poland’s local debt is 40 percent foreign- held, and private pension curtailment could leave slack upon withdrawal.
The non-government model’s pioneers in Latin America in turn increasingly deploy assets abroad after portfolio ceilings were lifted. In Peru for example the cap was recently hiked to one-third the total as these holdings come to $15 billion or 8 percent of GDP, the IIF reports. Uruguay has appeared as a high-yield treasury destination despite imposition of a 50 percent reserve requirement. In MENA Egypt’s prospects remain “challenging” with the Muslim Brotherhood unable to restore confidence or Fund credit, while in Sub-Sahara Africa Nigeria’s surge may have come partially at South Africa’s expense. It joined the JP Morgan local currency index, and despite similar inflation problems labor confrontation has not been as conspicuous although terror attacks carry their own brutality.
