Emerging-market capital inflows soar to a decade high, expected to reach USD 200 Bn in 2024

New Delhi [India], February 6 : Fitch Ratings projects an upsurge in emerging-market (EM) net capital flows to reach a decade high in 2024, totalling an estimated USD 200 billion.
The anticipated increase is attributed to several factors including higher growth prospects in emerging markets compared to developed markets and the potential for US Federal Reserve rate cuts later in the year.
The latest Economics Dashboard released by Fitch analyses trends in net private capital flows to the largest emerging markets, focusing on nine EM countries covered in Fitch's "Global Economic Outlook" (GEO).
The aggregate measure of net capital flows to emerging markets, excluding China, encompasses four categories: foreign direct investment (FDI), portfolio equity, portfolio debt, and bank flows.
Historically, net EM9 capital flows reached their peak in late 2007, totalling USD 408 billion, equivalent to around 5 per cent of EM9 GDP. Following a sharp decline during the global financial crisis, capital flows swiftly recovered and remained robust during the first three phases of Fed quantitative easing, averaging approximately 3 per cent of GDP from 2010 to 2013.
However, flows weakened notably from 2015 onward, primarily due to a decrease in portfolio debt flows and negative net flows in banks and equity.
Over the past two years, EM9 net flows exhibited volatility, notably turning sharply negative in 2022 before rebounding in the year ending in the third quarter of 2023.
This volatility was influenced by a surge in outflows from Russia in 2022. Nonetheless, when excluding Russia from the analysis, the underlying trend showed that net capital flows in EM8 were positive at USD 121 billion in 2022, although still relatively weak compared to historical levels at around 1 per cent of GDP.
Fitch's model, which assesses the global macro drivers of aggregate EM9 capital flows, incorporates variables such as the VIX measure of risk appetite, the GDP growth differential between emerging markets and developed markets, and US monetary policy.
Based on this model, emerging-market capital flows are projected to rebound strongly in 2024, reaching 2.2 per cent of GDP.
The anticipated increase in capital flows underscores growing investor confidence in emerging markets, driven by favourable economic conditions and expectations of accommodative monetary policies in major economies.
However, ongoing global economic uncertainties and potential shifts in monetary policies could influence the trajectory of capital flows in the coming months.