THE flood of capital gushing out of emerging markets has risen towards $1tn over the past 13 months, roughly double the amount that left during the financial crisis, amid slumping confidence in developing economies.

The sustained exodus reinforces concerns that emerging market economies, suffering slowing growth and weakening currencies, are relinquishing their longstanding role as engines for global growth to become a drag on demand.

Analysts say the flow may accelerate following China’s currency devaluation this month and nervousness over an expected US Federal Reserve rate rise.

“These outflows have much further to go,” said Maarten-Jan Bakkum, senior emerging market strategist at NN Investment Partners, an investment bank. Capital outflows result when investors, corporations, financial institutions and others move their money offshore, thereby applying downward pressure on the country’s currency.

Outflows double those of financial crisis, as China devaluation threatens fresh exodus

Total net capital outflows from the 19 largest emerging market economies reached $940.2bn in the 13 months to the end of July, almost double the net $480bn that flowed out during three quarters in the 2008-09 financial crisis, according to a compilation of official data and estimates by NN.

The outflows mark a sharp reversal from the robust infusion of funds that emerging markets received in the six years following the crisis as they helped invigorate a feeble global economy. From July 2009 to the end of June last year, a net $2tn in capital flowed into the 19 emerging markets, NN found.

As funds flow out, a vicious circle is triggered. Currencies tumble against the dollar, damping demand for imports and driving down aggregate demand. In June, for example, emerging market imports were 13.2 per cent lower year-on-year, according to a moving average compiled by Capital Economics.

“The collapse in emerging market imports reflects a more fundamental drop in demand as capital outflows have forced domestic demand to shrink and lower commodity prices have eroded incomes in commodity-producing countries,” said Neil Shearing of Capital Economics. “So far, there is little sign that we have reached the bottom.”

Emerging market currencies again came under strain early last week as traders judged that China’s devaluation of the renminbi had removed a rare anchor of currency market stability. In addition, a 6.1pc and 6.6pc fall in the main indices of the Shanghai and Shenzhen stock markets, respectively, undermined confidence in Beijing’s ability to reinvigorate economic growth.

“Emerging market currencies are currently facing the worst of all storms,” said Bernd Berg, strategist at Société Générale. “Global growth fears [are] driven mainly by a significant slowdown in emerging market countries, while the lukewarm recovery in developed nations is not strong enough to counteract weakness in China and other emerging countries.”

Expectations that the Federal Reserve will raise rates this autumn underpins the dollar’s strength against developing nation currencies, while fears over China’s economy and political tensions in Turkey, Russia, Brazil and Malaysia are undermining general confidence.

Published in Dawn, Economic & Business, August 24th, 2015

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