EMs see $4 billion outflows in June amid fears of global recession

The Institute of International Finance (IIF), the global association of the financial industry, with close to 450 members from 70 countries, on Thursday said that Emerging Markets (EMs) saw $4 billion outflows in June 2022 as fears of a coming global recession grew stronger.

In the IIF’s latest Capital Flows Tracker, Jonathan Fortum, an economist at the Institute, noted: ““We estimate that EM securities suffered an outflow of $4 billion in June 2022, making this the fourth consecutive month of outflows.”

However, the IIF data showed that only Latin America gained a sit received inflows to the tune of 5.7 billion, while other regions showed outflows.

The Russian invasion of Ukraine in February, the effects of the war and associated sanctions have started to spill out into the global economy, raising fears stagflation will tip the global economy into recession.

It may be recalled that even the World Bank has almost halved its global growth prediction to 2.8% this June and now global commodity prices have come off their April highs, when traders were worried about supplies, falling drastically in just the last few weeks as traders switch their concerns to withering demand.

Oil Prices Decline

Oil prices dropped to below $100 per barrel on July 6 for the first time since the war started, and copper prices, widely seen as a forward looking indicator of where the global economy is going, have sold off from an all-time high of $10,500 per tonne in April to $7,500 now.

Fortum further said: “At the same time, slowing growth fears are being fuelled by sky-high inflation that has led central banks around the world to aggressively hike rates. Economists say that the tightening cycle is far from over, although central banks in the EMs began tightening much earlier than their developed market peers, led by Russia and Ukraine in March last year.”

He said that even after these hikes, many countries still reported deeply negative real interest rates. We are in a global interest rate and high inflation shock.

“Mounting global recession risk is weighing on EM flows as anxiety builds over geopolitical events, tighter monetary conditions and realised inflation. The continued volatility in equity markets has hurt the outlook considerably,” Fortum averred.

Significant Outflows

IIF capital flows tracker reported significant outflows from some key emerging markets. EM equities (excluding China) saw $19.6 billion of outflows in June, whereas China saw $9.1 billion of inflows in the same period.

EM debt saw $9.1 billion of inflows, mainly targeting corporate bonds, while Chinese debt saw $2.5 billion of outflows.

The capital flows tracker further said that these concerns have driven up yields at the longer end of the bond curve across the developed world in the face of tightening monetary policy and rising risk off sentiment. “That in turn is sucking out money from the EMs, an outflow episode similar in scale to the RMB devaluation scare in 2015 and 2016,” the IIF added.

“Despite the recent readings, we remain constructive, as most of the big emerging markets started hiking well ahead of advanced economies, which now leaves real longer-term interest rates across many EMs well above their G-10 counterparts,” Fortum said.

“That provides some protection from the current global interest rate shock. That said, there are obviously pockets of weakness in EM – where real interest rates are deeply negative – and risks for these countries are rapidly mounting.”

Furtom further said: “For the coming months, several factors will influence flows dynamics, among these the timing of inflation peaking and the outlook for the Chinese economy will be in focus.”