Capital flows to emerging markets drop 48% in July amid spike in coronavirus cases

Emerging markets attracted around $15.1bn in capital flows last month, according to the IIF

epa08581570 People wear mask to get protected from the novel coronavirus COVID-19, in Bangalore, India, 03 August 2020. India is listed as the third highest country worldwide in regard to total COVID-19 cases after the United States and Brazil.  EPA/JAGADEESH NV
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Capital flows to emerging markets securities fell 48 per cent month-on-month in July amid a spike in coronavirus cases and growing concerns about the impact of the Covid-19 pandemic on the global economy, according to a new report by the Institute of International Finance.

Emerging markets attracted around $15.1 billion (Dh55.45bn) in capital flows last month, bucking the trend in in June which saw a nine-fold increase in flows, the report shows.

“Emerging-market stocks and debt posted a second month of positive flows, with investor appetite underpinned by a falling dollar and an accommodative Federal Reserve,” the IIF said. “The advance [however] was limited by concern about a resurgence in virus cases and the dim global outlook for growth.”

Several countries across Asia and Europe have seen a second wave of coronavirus cases in the last two months as governments eased movement restrictions to allow resumption of businesses.

As of Tuesday, there were more than 18.4 million global coronavirus cases, with about 11.6 million recoveries while the death toll stood at more than 697,000, according to Worldometer.

Emerging market economies including Brazil and India are among the hardest hit with the total number of cases at more than 2.75 million and 1.85 million respectively.

The total debt flows to emerging markets reached $13.2bn in July, while on the equity side, inflows reached $2.3bn, the report said.

Regionally, EM Asia benefited the most, registering inflows of $9.9bn, followed by EM Europe at $2.0bn, according to the report.

The world economy is set to slide into the deepest recession since the Great Depression, with the International Monetary Fund projecting a 4.9 per cent contraction this year and a sluggish recovery in 2021.

Growth in China will decelerate to 1 per cent, compared to a previous 1.2 per cent growth estimate, after expanding 6.1 per cent in 2019, its slowest pace in about three decades, according to the fund.

Indian economy is expected to contract by 4.5 per cent and Brazil by 9.1 per cent, the fund said in a report in June.

“While sentiment metrics show a rebound in the outlook, hard data are still lagging behind,” the IIF said.

“Overall, the shape of the recovery will be dependent on the capacity of the EM complex to put in place efficient policies to catalyse a recovery.”

Moving forward, “we see investors being more discerning” regarding investment decisions towards emerging markets, the IIF said.