Uneven, slow recovery seen in flows to emerging markets: IIF

By Reuters On Oct 7, 2020

Uneven, slow recovery seen in flows to emerging markets — FILE PHOTO: A man wearing a protective mask walks past the Bombay Stock Exchange (BSE) building in Mumbai, India, March 13, 2020. REUTERS/Francis Mascarenhas

NEW YORK (Reuters) – Emerging markets are in line for a slow, uneven recovery and patchy capital inflows, with developing economies outside China and India on track for a deeper recession than in the wake of the global financial crisis, the IIF said in a Wednesday report.

The global effects of the absence of China’s 2009 massive infrastructure push and India replacing a strong expansion with a steep contraction both account for this recession being deeper than the one in 2009, the Institute of International Finance said.

“China is not repeating its very large infrastructure stimulus of 2009, which means that global activity and commodity prices are not getting the lift they did in the wake of the global financial crisis,” the IIF said.

The Chinese economy grew at a 9.4% rate in 2009 and IIF estimates it will expand by just 2.2% this year. India, expected to contract 11.3% this year, posted an 8.5% growth rate in 2009.

(Graphic: The COVID hit to economic growth – https://graphics.reuters.com/GLOBAL-EMERGING/IIF/ygdpzkobgvw/chart.png)

The report notes that non-resident flows to emerging markets have been much weaker this year than in 2009 despite the “unprecedented” amount of quantitative easing, with Latin America hit especially hard not only by the pandemic but by Venezuela’s and Argentina’s idiosyncrasies.

Further hurting the commodity-dependent region, China’s sub-par growth has also kept a lid on prices of basic materials.

The upcoming U.S. presidential election adds to the uneven quality of flows to EM, as the threat of sanctions rears its head.

“In the near term, risks are more pronounced for Russia, but sanctions are likely to play an increasingly important role in US-China relations,” the IIF report said.

“We expect additional sanctions on Russia to remain on the political agenda.”

Flows to China are expected to tick up this year and rise to a record in 2021.

(Graphic: Portfolio flows to China – https://graphics.reuters.com/GLOBAL-EMERGING/IIF/qzjvqnbdypx/chart.png)