Dollar rise a 'paradigm shift' for emerging market investment: IIF

LONDON: A surging dollar is likely to hit foreign investment into emerging markets this year, the Institute of International Finance (IIF) said today, cutting its capital inflow forecast for this year by US$43 billion to US$1.22 trillion (RM4.8 trillion).
The Washington DC-based group, an authoritative tracker of capital flows to and from emerging markets, called the dollar’s rise and higher US yields “a paradigm shift” for investors.
As a result, capital inflows would likely hold at the levels seen last year, it said, cutting its previous forecasts from February.
“Prospects for non-resident capital inflows to emerging markets this year have deteriorated ... rising US bond yields and a stronger dollar have prompted a ‘sudden stop’ in portfolio flows since mid-April.”
As a share of gross domestic product, capital inflows will fall to 3.7% from 4.2% in 2017, it added.
Since mid-April, the dollar has strengthened around 5% while US 10-year yields have risen past the key 3% mark for the first time in four years. That is exerting huge pressure on emerging markets, pushing currencies lower and bond yields higher.
Argentina, one of the worst-hit countries, has been forced to seek help from the International Monetary Fund.
The IIF predicts emerging bond markets to be worst hit, with inflows of US$255 billion this year, down from last year’s record US$315 billion. Monthly inflows so far this year averaged US$13 billion through April, it noted, half year-ago levels.
A 100 basis-point rise in US yields would cut flows to emerging debt by US$20 billion, the IIF suggested. It also cut forecasts for equity flows to US$94 billion for 2018 but noted this would still be US$8 billion above last year.
The group remains optimistic on future prospects, however, predicting the developing world to receive inflows of US$1.35 trillion next year, thanks to still-firm strong economic growth
and trade.
Another bright spot is "direct", bricks-and-mortar investment or FDI, which makes up 40% of emerging markets' capital flows. The IIF revised up previous forecasts for 2018 FDI by US$43 billion to US$523 billion, the highest in three years.
"The robust growth differential between emerging and mature markets will be supportive, while the modest recovery in commodity prices has been another key factor," it added.
With overall capital inflows holding steady at last year's levels and most emerging central banks reluctant to intervene in currency markets, the IIF said it expected their hard currency
reserves to rise in 2018 by US$220 billion, most of it in China. – Reuters