By Martin Hutchinson
If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm - if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year - an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.
For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.
The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.
Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.
In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.
Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 - almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.
This will cause a reordering of the economic pecking order in the emerging markets.
From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well.
In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.
Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly.
