23 January 2012

IIF: Euro area crisis seen as major factor in sharp reduction in net private capital flows to emerging markets

The sovereign debt difficulties in a number of European countries are having a growing impact on the global economy and on sentiment in financial markets. The crisis is contributing to bank deleveraging, which is damaging the prospects for both growth in Europe and for capital flows to emerging markets.

IIF forecasts 2012 flows to emerging markets at $746 billion – more than $150 billion below 2011 moderated volume.

The euro area crisis is having a negative impact on net private capital flows to emerging markets, as new forecasts from the Institute of International Finance (IIF) point to a substantial slowing of flows into these markets in 2012, following a significant reduction in the second half of 2011.

The IIF said net private capital flows to emerging markets this year are likely to total $746 billion, down from an estimated $910 billion in 2011, which in turn is a decline from the 2010 level of $1,040 billion. On the assumption of a gradual stabilisation of the European economic situation in the course of this year and a revival of albeit subdued growth in Europe in 2013, the IIF projects a recovery in flows next year to around $900 billion.

The IIF is the global association of financial services firms with more than 450 member institutions. IIF Managing Director, Charles Dallara, said: “The euro area crisis is a major factor in the slowing of capital flows to emerging markets. The component of the overall net private flows to show the largest decline in the second half of 2011 was bank lending and we expect that net flows from banks to emerging markets will be quite weak for 2012 as a whole.”

IIF Chief Economist and Deputy Managing Director, Philip Suttle, said: “Our expectation of a protracted adjustment process in the euro area leads us to think that outward investments are likely to remain weak. This is the main driver behind our downward revision in capital flows to emerging economies for 2011 and our new forecasts for 2012. We anticipate that tensions in Europe will subside only gradually. We currently forecast a mild recession for the region, with output contracting at a 1.5-2 per cent annualised pace from the final quarter of 2011 through the first half of 2012, followed by a sluggish resumption of growth.”

The IIF said it estimates that net commercial bank flows to emerging markets declined to $137 billion in 2011 from $162 billion in the previous year. For 2012, the IIF projects a sharp further fall in bank flows to a total of $38 billion, but a recovery is seen next year with a volume of $96 billion. The new forecasts show declines in net non-bank (mostly bonds) flows in 2011 to $301 billion from $319 billion in 2010, and a substantial drop in the total is now seen for this year to $211 billion, while a moderate upswing is projected in 2013 to $240 billion. Although there was a strong decline in net portfolio equity flows last year to $44 billion from $193 billion in 2010, the IIF forecast a 2012 recovery to $76 billion and a further advance to $116 billion in 2013.

Commenting on the euro area crisis at an IIF press conference in Zurich, Mr Dallara said: “Progress has been made by euro area leaders towards stabilising the sovereign debt market. However, the leaders, who are due to meet next week, need to do still more at the national and regional levels to restore market confidence on a sustained basis.”

Mr Walter Kielholz, Vice Chairman of the IIF Board of Directors and Chairman of Swiss Re, speaking at the press conference noted that: “The IIF’s report underscores that 2012 will be a testing and uncertain year for private capital flows to emerging markets. Indeed, the 2012 forecast is for a volume of such flows that will be more than 25 per cent below the one trillion dollar level seen in 2010. Notwithstanding this significant reduction, the report today highlights the underlying strengths of many of the emerging market economies, which as a group are seen as continuing to have stronger economic growth than the mature industrial economies.”

Press release

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