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April 2019 Capital Flows to Emerging Markets

Benjamin Hilgenstock · Boban Markovic · Garbis Iradian · Gene Ma · Gregory Basile · Jonah Rosenthal · Jonathan Fortun · María Paola Figueroa · Martín Castellano · Phoebe Feng · Reza Siregar · Robin Brooks · Sergi Lanau · Tariq Khan · Ugras Ulku · Yuanliu Hu / Institute of International Finance

Improving global growth signals and a more accommodative Federal Reserve did not translate into a uniform emerging market currency or capital flow rebound in early 2019. The report attributes that gap to heavy investor positioning accumulated during a decade of loose monetary policy in the major economies. It therefore raised its 2019 nonresident inflow forecast only modestly, to $1,260 billion from $1,135 billion in 2018.

Global Macro Views: The EM Positioning Problem

Jonathan Fortun · Robin Brooks · Tariq Khan / Institute of International Finance

Why did a more accommodative Federal Reserve fail to lift many emerging market currencies in early 2019? Jonathan Fortun, Robin Brooks and Tariq Khan suggest that accumulated investor positions after years of easy monetary policy limited the response to further easing. Excluding China, the recovery in flows appeared weak, with meaningful first quarter inflows concentrated in Indonesia and Mexico.

February 2019 EM Growth Tracker

Jonathan Fortun · Tariq Khan / Institute of International Finance

Improving financial conditions were not enough to arrest the emerging market growth slowdown in February 2019. Jonathan Fortun and Tariq Khan report a tracker reading of 2.8% on a seasonally adjusted, annualized three month basis, as hard data and business sentiment weakened. They nevertheless anticipated a rebound over the following months.

Mint (Bloomberg) · Mention

'Wall of Money' is heading for emerging markets, IIF says

Fortun and Tariq Khan's IIF analysis connects renewed emerging-market demand to a more accommodative Federal Reserve, easing trade tensions and improved growth sentiment.

Global Macro Views: Updating our EM FX Fair Values

Jonathan Fortun · Robin Brooks · Tariq Khan / Institute of International Finance

Updated currency valuations incorporate the large exchange rate, current account and activity changes surrounding the 2018 emerging market selloff. In the February 2019 estimates, the Argentine peso and Turkish lira remained only mildly expensive, while India, Indonesia and South Africa showed greater overvaluation. Emerging Asia, including China, remained substantially undervalued under the framework.

Global Macro Views: The Fed Restarts the Wall of Money to EM

Jonathan Fortun · Robin Brooks · Tariq Khan / Institute of International Finance

The Federal Reserve’s early 2019 shift away from tightening could revive capital inflows to emerging markets even though investors had already priced in a pause. High frequency flow data were showing a sharp increase as the search for yield resumed. The analysis identifies South Africa as the most crowded positioning case, with Brazil and Russia the least heavily positioned among the markets assessed.

IIF Capital Flows Tracker: Closing the Year on a Softer Note

Jonathan Fortun · Tariq Khan / Institute of International Finance

Concern about global growth weakened emerging market portfolio investment at the end of 2018. Jonathan Fortun and Tariq Khan report December inflows of $3.1 billion, comprising $2.9 billion in equities and just $0.2 billion in debt. Their broader net capital flow measure remained negative in November, a separate observation from the December securities figures.

Asymmetric Disintermediation

Brad Carr · Jonathan Fortun / Institute of International Finance

Digital platforms and potential central bank digital currencies could change how stable retail deposits are as a source of bank funding. Brad Carr and Jonathan Fortun explored scenarios in which innovation affects bank balance sheets unevenly, despite banks having shifted toward more stable funding after the financial crisis. The December 2018 analysis treated these developments as emerging possibilities, with implications for liquidity management and the regulatory treatment of deposits.