The Institute of International Finance (IIF), the global association of financial institutions, has forecast a sharp drop in net capital inflows to emerging markets in 2009, to $165 billion, from $466 billion (Rs22.78 trillion) in 2008. The size of the drop becomes clearer when we recall that 2007 saw a net inflow of $929 billion.
But there is a ray of hope for the stock markets—net portfolio outflows from emerging markets are expected to be much lower this year, at a mere $3 billion, compared to a staggering $89 billion last year. Says IIF: “With equity positions smaller and prices much lower, we project net portfolio equity outflows to be quite modest in 2009.” Even better, IIF estimates emerging Asia will see a net inflow of $7 billion worth of portfolio investments in 2009, after net outflows of $55 billion last year.
Yet private financing for emerging Asia, too, is expected to dip from $96 billion in 2008 to $65 billion in 2009 (net inflows were $315 billion in 2007), partly because foreign direct investment, which has held up rather well so far, is expected to see a drop. Foreign commercial bank lending is expected to shrink by $25 billion this year, compared with net lending of $30 billion in 2008 and $156 billion in 2007. It will mean a further drying up of funds for companies in emerging markets, unless local banks take up the slack. Repayments of overseas borrowing will add to the pressure—according to IIF, Indian companies face redemption pressure on repayments of foreign bonds and syndicated loans of $8.1 billion in the first quarter of 2009, $8 billion in Q2, $6.7 billion and $5.7 billion in Q3 and Q4, respectively. What this means is that although the price-earnings multiple may not contract much, stocks could still fall as earnings shrink.
Says IIF: “The current slump in net private capital flows to emerging markets is shaping up to be the most dramatic on record. This is a remarkable development, since the two previous serious crisis episodes—1981-86 and 1996-2002—were periods of very severe adjustment for emerging market economies. Net private inflows fell from a peak of 3.5% of emerging market GDP (gross domestic product) in 1981 to a trough of 0.3% of GDP in 1986; they fell from a peak of 5.7% of GDP in 1996 to a trough of 2% of GDP in 2002. This time around, however, net flows seem likely to fall from a peak of 6.9% of GDP in 2007 to just 1.1% of GDP in 2009.” The scary part is not only in the sharp drop this time,?but the?years it took for capital flows to trough in the earlier episodes.
IIF is forecasting world growth to be a grimly negative 1.1% this year, while growth in India is estimated to drop from 6.2% in 2008 to 5% this year. That perhaps puts IIF in the bullish camp—Societe Generale, in its Asia Economic Scrapbook dated 22 January, puts Indian GDP growth at 4.2%, with negative growth of 4.3% in the second quarter.
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