Emerging Markets Economics

Emerging Markets Capital Flows Monitor (Oct. 2019)

Emerging Markets Economics Update
Written by Alex Holmes

We estimate that net capital outflows from emerging markets (EMs) eased in October, and more timely data point to a further improvement so far this month. But we doubt that, on a net basis, capital will flow in to EMs anytime soon.

  • We estimate that net capital outflows from emerging markets (EMs) eased in October, and more timely data point to a further improvement so far this month. But we doubt that, on a net basis, capital will flow in to EMs anytime soon.
  • Capital flows play a major role in EMs, as they finance spending and affect financial market performance. But official data tend to be released with a considerable lag. To overcome this, we’ve constructed our Capital Flows Tracker, which has a good relationship with the less timely official balance of payments data. (See Chart 1 & Table 1; details available upon request.)
  • Our Tracker suggests that EMs continued to experience net capital outflows at the start of Q4, but the pace eased compared to Q3. We estimate that net outflows were around $15bn in October. (See Chart 2.) This compares to an average of around $25bn per month in Q3.
  • At less than 0.7% of aggregate EM GDP, outflows remain modest in comparison to past episodes of heightened risk aversion. During the China hard landing fears in 2015-16 net outflows reached over 3% of EM GDP. (See Chart 3.)
  • Our Portfolio Flows Tracker suggests that inflows into EM bonds and equities picked up. We estimate that net portfolio inflows were around $85bn in the three months to October, up from $60bn in Q3. (See Chart 4.) The pick-up was mostly down to a recovery in net portfolio inflows into Asia. (See Chart 5.) This has presumably been the result of hopes of a “Phase One” trade deal between the US and China.
  • More timely data on foreigners’ net purchases of EM stocks and bonds corroborate this view. These daily data are not comparable to our Portfolio Flows Tracker, as they are only published by a handful of countries. But they can help to give a sense of direction. Foreign investors made net purchases of these countries’ equities and bonds for the first time in nearly four months during the first week of November. (See Chart 6.)
  • However, much of the good news on the Phase One trade deal is probably now priced in to EM bond and equity markets. That should limit any further pick-up in portfolio inflows in the near term. More fundamentally, optimism surrounding the Phase One deal looks overdone.
  • The rollback in tariffs reportedly contained in the deal is small. We estimate that the average US tariff rate on China’s imports would only drop from 21% to 18%, compared to 3% prior to the trade war. This suggests that both sides are unwilling to significantly reduce trade protection. Moreover, major sticking points remain. These intractable issues are likely to cause future rounds of US-China talks to break down.
  • At the same time, weak global growth will continue to weigh on risk appetite and capital flows to EMs. Admittedly, the downturn in global growth is close to bottoming out. But the pace of the recovery will be weaker than most expect, keeping a lid on risk appetite.
  • The upshot is that, despite the recent improvement, EMs are likely to face continued net capital outflows in the coming quarters. Net outflows will be small, so shouldn’t cause major repercussions for macroeconomic and financial market stability. But at the margin, it is another reason why the recovery that we expect in EM GDP growth will be weak.

Chart 1: EM Total Capital Flows & CE Total Capital Flows Tracker ($bn, Quarterly Sum)

Chart 2: CE Total EM Capital Flows Tracker
($bn, Monthly)

Chart 3: CE Total EM Capital Flows Tracker
(Quarterly Sum)

Chart 4: CE Portfolio Inflows Tracker
($bn, Quarterly Sum)

Chart 5: CE Portfolio Inflows Tracker
($bn, Quarterly Sum)

Chart 6: Foreigners’ Net Purchases of Equity & Bonds
(US$bn, 1m Sum*, based on daily data)

Sources: Refinitiv, CEIC, Capital Economics

Table 1: CE Capital Flows Tracker Information

Total Capital Flows Tracker

Measures total net capital flows into EMs, including portfolio flows, direct investment and bank (“other”) flows. Includes non-residents’ net purchases of domestic assets and residents’ net purchases of foreign assets. Published on a rolling quarterly basis (which corresponds with the quarterly official balance of payments data).


Portfolio Flows Tracker


Measures non-residents’ net purchases of EM bonds and equities at an EM-wide level and at a regional level. Published on a rolling quarterly basis (which corresponds with the quarterly official balance of payments data).


Alex Holmes, Emerging Asia Economist, +65 6595 1515, alex.holmes@capitaleconomics.com