NEW YORK (Reuters) – Capital flows to emerging markets not including China suffered a “sudden stop” this quarter according to the Institute of International Finance, setting up some EMs poorly for an expected monetary tightening cycle in developed economies.
“Our high-frequency tracking shows flows into non-China EM grinding to a halt this quarter,” said IIF economists, with “important emerging markets” all but acting as closed economies over the past few years.
“Emerging market flows have gone into a de facto sudden stop.”
Higher rate hike expectations have tracked the rise in inflation measures in developed economies, especially in the United States, forcing many emerging market central banks to tighten monetary policy.
The IIF analysis shows three of the largest EMs as the weakest in terms of inflows over the past three years to shield from the expected outflow of capital that would follow higher U.S. rates.
“Argentina, Brazil and Turkey are all in quasi financial autarky, with inflows in recent years near zero, as foreign investors steer clear of stocks and bonds in these countries,” the IIF said.
The report said the large devaluation in the Turkish lira, down nearly 35% against the dollar so far this quarter, and down 46% year-to-date, “is likely to worsen the picture going forward, given that contagion to the rest of EM is possible.”
Argentina’s peso has fallen 17% this year in a controlled slide while Brazil’s real has fallen 8%.
The IIF will publish its monthly nonresident capital flows report for November on Friday.
(Reporting by Rodrigo Campos in New York; Editing by Matthew Lewis)