Capital flows to emerging markets see 'dramatic collapse' as virus spreads

Portfolio flows in February slumped to $3.4bn, sharply down from $29.5bn in January, Institute of International Finance says

SHANGHAI, CHINA - FEBRUARY 03: Medical workers spray antiseptic outside of the main gate of Shanghai Stock Exchange Building on February 03, 2020 in Shanghai, China. (Photo by Yifan Ding/Getty Images)
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Portfolio capital flows to emerging markets securities declined significantly in February as the spread of the coronavirus shakes financial markets and fears of a global recession rise.

Emerging markets securities – both debt and equity – attracted only $3.4 billion (Dh12.48bn) last month, a sharp drop from $29.5bn recorded in January, the Institute of International Finance said in its latest report.

“This is largely a result of the dramatic collapse of flows in the last one-and-a-half weeks, when the increasing spread of the coronavirus rattled global financial markets,” IIF economists Jonathan Fortun and Benjamin Hilgenstock wrote in the report. “Effects are noticeable both on the debt and equities sides of non-resident portfolio flows.”

While the impact of the virus was first noticed in January and confined in China, its spread to more countries in recent weeks made a dent in other markets, especially in emerging Asia. Debt flows fell to $13.2bn, almost a 60 per cent decline from January level.

On the equity side, the negative trend continued last month with flows to China essentially coming to a halt as $9.8bn was pulled from emerging market equities, following on from the $6.8bn withdrawn in January. The level of outflows from emerging markets over the past two months are equivalent to the “trade tantrum” episodes over the past two years, when US-China trade tensions affected equity dynamics, the institute said.

The spread of the coronavirus to every continent except Antarctica from its origin in the Chinese city of Wuhan is threatening to decelerate global economic growth to the slowest pace since 2009. The Organisation for Economic Co-operation and Development, earlier this week revised down its estimate of global GDP growth by half a percentage point to 2.4 per cent in 2020. It said growth could fall to 1.5 per cent if the outbreak persisted and could tip many countries into recession.

Global fatalities from the outbreak have topped 3,100 and the number of confirmed cases has swelled past 91,000. The  rate of new cases is now higher in countries such as South Korea, Iran and Italy than it is in China.

Growth concerns contributed to sharp falls on major stock markets last week, wiping $7 trillion off equities. The International Monetary Fund and the World Bank are preparing to assist the countries most affected by the virus.

The IIF said the significant decrease in debt flows was broad-based, with emerging Asia markets experiencing the largest change – from $13bn in January to $5.1bn in February. The region also saw the most noticeable change in terms of equity flows – from a $2.6bn inflow in January to a $4.5bn outflow last month.

Outflows from Latin American markets moderated somewhat in February but grew slightly in emerging Europe and  the Middle East and North African region.