The Institute of International Finance (IIF) on Thursday lowered its forecast for private capital flows to emerging markets in 2014, largely due to weaker inflows in the first half of 2014 as the Ukraine crisis is weighing heavily on flows to Russia.
The total private capital flows to emerging markets are expected to reach 1,032 billion U.S. dollars in 2014, 47 billion dollars lower than the institute's forecast in January, the IIF, a global association of the financial industry with nearly 500 members from 70 countries, said in a statement.
The IIF expected the overall private flows to emerging markets in 2014 would be about 120 billion dollars lower than that in 2013.
"The environment for capital flows to emerging markets has become very supportive as the global economy gains momentum, risk aversion has come down to very low levels, and U.S. long-term interest rates have eased," said Charles Collyns, chief economist at the IIF, in the statement.
"Portfolio flows have surged in recent months according to our Portfolio Flows Tracker, although the overall level of flows has taken a hit from the fallout of the Ukraine-Russia crisis," Collyns said.
In addition to contagion from a possible further escalation of the Ukraine-Russia crisis, the IIF noted that capital flows to emerging markets remain vulnerable to surprises in the timing, pace and magnitude of eventual Federal Reserve policy tightening.
If investors come to anticipate that the Fed will tighten interest rates at a faster pace equivalent to that in the mid- 2000s, then private capital flows could decline by around 110 billion dollars or 0.65 percent of emerging market GDP, the IIF said.
The stability of capital inflow will also vary among the different countries and regions of the emerging markets, depending on their own economic situations, said the IIF.
"Countries that have reduced macroeconomic vulnerabilities will be less affected by stress and see stable capital inflows, while those that delay reforms remain more exposed to swings in capital flows," said Hung Tran, executive managing director at the IIF, in the statement.
