Weekly

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Economic Commentary
QNB Economics
economics@qnb.com
8 February, 2015
Capital Flows into Emerging Markets to Remain Volatile in 2015
After an unsteady year in 2014, capital flows
to Emerging Markets (EMs) are likely to
remain volatile in 2015. Significant
adjustments to global financial conditions in
2014 included a large drop in commodity
prices, the end of Quantitative Easing (QE) in
the US and a stronger US dollar. Looking
ahead, these developments, particularly the
drop in crude oil prices, will lead to significant
divergence in EM performance, adding to risks
in specific countries such as Nigeria, Russia
and Venezuela. Therefore, we project EM flows
to remain volatile in 2015, particularly as a
possible increase in US policy rates by the
Federal Reserve (Fed) may attract flows to the
US while EM growth continues to slow and
commodity prices remain low.
Towards the end of 2013 and in early 2014,
capital flows to EMs subsided as the
implementation of QE tapering in the US led to
tighter global liquidity. In mid-2014, EM
capital inflows recovered, though they slowed
down again in the second half of the year
(USD86bn compared with USD131bn in the
first half of the year, according to the Institute
of International Finance [IIF]). The end of QE
in the US led to another bout of EM capital
flight, weakening exchange rates and
prompting some countries to increase interest
rates. In turn, this weakened the growth
outlook for EMs and led to greater global risk
aversion. Finally, a number of EMs have high
levels of USD denominated debt, which is
becoming more burdensome with the stronger
US dollar.
Throughout 2014, there was significant EM
differentiation between those markets that
have been able to take the necessary measures
to reduce their current account deficits and
stabilise their currencies (notably India and
Indonesia) and those that are still struggling to
contain the loss of confidence in their
economies (Brazil, Nigeria, Russia, South
Africa, Turkey and Ukraine). Much of the loss
of confidence in the latter group has been
driven by lower global commodity prices,
primarily crude oil.
Portfolio Debt and Equity Flows to EMs
(2013–14)
(bn USD)
Sources: IIF Portfolio Tracker and QNB Group analysis
In December 2014 there was a net outflow of
both debt and equity capital from EMs of
USD11.1bn (the largest outflow since the
announcement of QE tapering in May 2013).
Global risk aversion rose amidst an
intensification of the Russian crisis, the
further slide in oil prices, which raised concern
about a global Great Deflation (see our
commentary dated 25 January 2015), and the
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Middle East & Africa
Emerging Europe
Latin America
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2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com
8 February, 2015
re-emergence of the risk of Greek sovereign
debt default.
Looking ahead, EM differentiation is expected
to be a key theme in 2015. A critical issue will
be how vulnerable EMs that heavily depend on
capital inflows and have high external debt
levels will be affected by the continued rise in
the US dollar as well as the expected increase
in short-term interest rates in the US.
Although there is much uncertainty around
the timeline for Fed interest rate tightening,
the downside risks with respect to EM capital
outflows are clear. Should the Fed tighten at a
faster than expected pace, this could have a
further destabilising impact on capital flows to
EMs.
Oil prices will be a key differentiating factor in
2015. Lower oil prices are likely to be
supportive of oil importing EMs but less
beneficial for oil exporting EMs. In broad
terms, oil importers should see their current
account balances improve and inflation
lowered, leaving more room for monetary
stimulus. Meanwhile, oil exporters are faced
with deteriorating external balances combined
with fiscal pressures as oil revenues subside.
On balance, the biggest winners will be those
EMs with high levels of oil imports and high
inflation, such as India, Indonesia, South
Africa and Turkey. In contrast, large oil
exporters with deteriorating fiscal balances
and weak macro policy frameworks are in a
less favourable position, primarily Nigeria,
Russia and Venezuela, which, in the worst
case scenario, may be pushed into a balance of
payments crisis (see our commentary dated 21
December 2014).
In conclusion, we expect 2015 to be another
volatile year for capital flows into selected EM
markets, with a number of risks facing the
global economy. The strong US dollar coupled
with the expected US monetary policy
normalisation this year is likely to put further
pressure on capital flows to vulnerable EMs
and increase deflationary pressures. As a
result, additional exchange rate weakness,
higher interest rates, weak growth and
financial market instability can be expected in
selected EMs.
Contacts
Joannes Mongardini
Head of Economics
+974- 4453-4412
Rory Fyfe
Senior Economist
+974-4453-4643
Ehsan Khoman
Economist
+974-4453-4423
Hamda Al-Thani
Economist
+974-4453-4646
Ziad Daoud
Economist
+974-4453-4642
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