Stress from Within:EM Capital Flows Chartbook

Charles CollynsManaging Director and Chief Economist

October 2015

Rollercoaster Ride

2007 2008 2009 2010 2011 2012 2013 2014 2015-150

-100

-50

0

50

100

150 Financial Crisis QE1 QE2 QE3

Taper Tantru

m

RMB Shock

Monthly Tracker

Estimates

$ billion

Non-Resident Portfolio Flows to Emerging Economies

Source: IIF.

2

Data embedded in chart.

Daily Equity and Bond Flows to EMs

3

Source: National Sources, Bloomberg, IIF Calculations. Last Observation: Oct. 5thNote: Includes Indonesia, India, Korea, Thailand, South Africa, Brazil, and Hungary.

$ billion, all available countries

Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15-1.5

-1.0

-0.5

0.0

0.5

1.0

7-Day Moving Average

28-Day Moving Average

Data embedded in chart.

4

Retrenchment of Both Debt and Equity Flows

Source: IIF EM Monthly Portfolio Flows Tracker.

Data on final slide.

5

Retrenchment Across Regions

Source: IIF EM Monthly Portfolio Flows Tracker.

Data on final slide.

6

Institutional Investors May Be Capitulating

-150

-100

-50

0

50

100

RetailInstitutional

Source: EPFR, IIF.

$ billion

Data embedded in chart.

7

Diminishing EM Quarterly Capital Inflows

Source: National Sources, IMF, IIF.

Data on final slide.

Source: IIF.

8

Worst Year for EM Capital Inflows Since 2004

Data on final slide.

Source: IIF.

9

First Year With Net EM Capital Outflows Since 1988

Data on final slide.

10

Heavy Loss of EM Official Reserves

2000 2002 2004 2006 2008 2010 2012 2014 2016-400

-200

0

200

400

600

800

1000

1200

1400EM Europe Latin America

Middle East/Africa EM Asia excl. China

China

EM FX Reserve Accumulation by Region

$ billion

EM

IIF Fore-cast

Source: IIF.

Data on final slide.

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2015 2016

Forecast Revisions to Real GDP Relative to May GEMpercentage points

Forecast Revisions to GDP Growth Relative to May CFRpercentage points

11

EM Growth Shock

Data on final slide.

Source: IIF.

12

RMB Shock

Data on final slide.

Source: China Foreign Exchange Trading Center, Bloomberg, IIF.

13

Who’s Been Hurt The Most?

Source: IIF.

Data on final slide.

Bra

zil

Ukra

ine

Tu

rke

y

Co

lom

bia

Ma

laysia

S.

Afr

ica

Ind

o

Ch

ile

Me

xic

o

Arg

en

tin

a

Th

aila

nd

Ko

re

a

Eg

yp

t

-45

-30

-15

0

YTD Change in Spot FX Rate vis-à-vis the USD

percent

Source: Bloomberg, IIF.

YTD Change in FX Spot Rates vis-à-vis the USDpercent

Source: IIF.

14

Drought Likely To Be Protracted

Data on final slide.

15

Hoping for EM Growth Turnaround in 2016

Source: National Sources, IMF, IIF.

Data on final slide.

16

China Capital Flows – Where Next?

Source: SAFE, IIF.

Data on final slide.

17

Watching the Fed

Source: U.S. Federal Reserve, IIF.

% oya

U.S. Earnings & Employment Cost Index

Where’s the Inflation?

Source: U.S. Bureau of Labor Statistics.

18

U.S. Beveridge Curve (2001-2015 Data)

Source: Haver, Bureau of Labor Statistics, IIF.

job openings rate in % of total jobs (filled and vacant)

2006 2009 2012 20151.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Average Hourly Earnings (Total Nonfarm Pri-vate)

4 5 6 7 8 9 10 111.5

2.0

2.5

3.0

3.5

4.0

2001-2008H1

2008H2

2009

2010

2011

2012

2013

2014

2015

unemployment rate, % of labor force

Data embedded in chart.

Fed and ECB: Crosswinds for EM Flows

19

Jan 14 May 14 Oct 14 Feb 15 Jun 15-0.4

0.0

0.4

0.8

1.2

1.6

2.0

ECB Fed

Source: Bloomberg, IIF.Last Updated: September 2015.

December 2016 Policy Rate Expectations

percent per annum

Estimated Contributions to EM Portfolio Flows

Source: IIF.

$ billion; cumulative contribution since 1/1/2013

Jan 13 Sep 13 May 14 Jan 15 Sep 15-20

-15

-10

-5

0

5

10

15

20

Fed ECB

“Taper Tantrum”

“Bund Tantrum”

Data embedded in chart.

20

Source: Bloomberg, IIF.

EM Risk Betas Estimated Using EM MSCI and U.S. BBB Spread

estimated % response to 1% increase in global risk aversion

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

2000-2007

2008-2009

2012-2015

Closer Global Connections

Data embedded in chart.

21

-0.9-0.8-0.7-0.6-0.5-0.4-0.30

5

10

15

20

25

30

South Africa

Brazil

Poland Indonesia Turkey

India

China

Chile

Estimated Response to 1% Increase in Global Risk Aversion

Mexico

Share

of

Fore

ign O

wners

hip

of

Sto

cks

Estimated Risk Betas vs. Share of Foreign Ownership of Stocks

Source: Bloomberg, IIF.

0 1 2 3 4-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Brazil

South Africa

Poland

Indonesia

Tur-key

India

China

Chile

Estimated Response to 1% Increase in Global Risk Aversion

Mexico

Curr

ent

Acc

ount

Bala

nce

Risk Betas Estimated Using Bond Spreads vs. CA Balance

Source: Bloomberg, IMF, IIF.

percent of GDP, estimated for 2012-15

percent of GDP, estimated for 2012-15

Who’s Most Exposed?

Data embedded in chart.

RO PL CZ KO CN PH HU MX PE CL ID CO IN ZA TR BR-1

2

4

6

8

10

2015-End Inflation ForecastInflation RangeInflation Target

percent

Source: Bloomberg, IIF. Inflation is IIF’s year-end forecast from September 2015 Global Economic Monitor

Above Target in End-2015

Below Target in End-2015

Checking Central Bank Credibility

22

Data embedded in chart.

23

Rise of Corporate Indebtedness

Source: BIS, IIF.

Data on final slide.

Argentina

Indonesia

South Africa

Poland

India

Turkey

Malaysia

EM

Singapore

Hong Kong

0 50 100 150 200 250

LC

USD

EURO

Other

Source: BIS, IIF.

percent of GDP, 2015Q1

24

EM Non-Financial Corporate Debt

Data embedded in chart.

25

Cost of Currency Mismatches

Source: BIS, IIF.

Data on final slide.

• EM capital flows have been hit by home-made stresso EM growth disappointmentso China’s policy trilemma

• Protracted drought more likely than quick rebound

• It can get worse. Watch out for:o Further RMB surpriseso Return of the Fed hawks

Takeaways

27

Data

Microsoft Excel Worksheet