Emerging markets may weigh heavily on global growth

SHANGHAI • Capital gushing out of emerging market economies has neared US$1 trillion (S$1.4 trillion) in the past 13 months, roughly double the amount during the 2008-2009 financial crisis, causing a slump in confidence in these developing nations.

The sustained exodus reinforces concerns that emerging market economies, suffering slowing growth and weakening currencies, are relinquishing their longstanding role as locomotives for global growth to become a drag on demand instead, the Financial Times (FT) reported.

Analysts say an expected rate hike by the United States Federal Reserve and devaluation of the Chinese yuan may accelerate the flow.

"These outflows have much further to go," said senior strategist Maarten-Jan Bakkum from 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.

Official data and estimates by NN Investment show that a total net capital of US$940.2 billion left the shores of 19 largest emerging market economies until the end of last month, almost double the net US$480 billion that flowed out during three quarters when the financial crisis happened. This was a sharp reversal from the fund infusion these markets received in the six years following the crisis as they helped invigorate a feeble global economy, the FT report said.

"The collapse... 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 Mr Neil Shearing of Capital Economics. "So far, there is little sign that we have reached the bottom."

Brazil, Chile, India, Qatar, China and Thailand are among the vast range of emerging market countries. The expectation that the Fed may raise interest rates is underpinning the US dollar's strength against developing country currencies, while worries over China's economy and rising political tensions in Turkey, Russia, Brazil and Malaysia are undermining general confidence.

A version of this article appeared in the print edition of The Straits Times on August 20, 2015, with the headline 'Emerging markets may weigh heavily on global growth'. Print Edition | Subscribe