Developing economies, it seems, are no longer the engine of global growth they once were as emerging markets hemorrhage nearly $1 trillion over the past 13 months – double the $480 billion that fled during the financial crisis.
Analysts are now saying that this gush of capital is set to get stronger thanks to China’s currency devaluation and investor jitters over a US Federal Reserve rate hike.
Citing data from NN Investment Partners, the Financial Times reports that outflows from the 19 largest emerging economies reached an estimated $940.2 billion for the 13-months period to the end of July.
The outflows – triggered when investors move their money offshore thereby driving down the local currency – mark a stark contrast to the six years following the the crisis when a net $2 trillion flowed into the same group of countries between July 2009 and the end of June last year. Things are not going to get much better either as Maarten-Jan Bakkum, senior emerging market strategist at NN Investment , declares: “These outflows have much further to go”.
There is now a vicious circle as currencies fall against the US dollar, demand for imports slides, and commodities prices fall, eroding the income of commodity-producing countries. China’s devaluation of the yuan has not helped either, while the 6.1% and 6.6% falls on the Shanghai and Shenzhen bourses have dented confidence in Beijing’s ability to stem the tide. Bernd Berg, a strategist at Société Générale is also pretty glum about things.
“Emerging market currencies are currently facing the worst of all storms. Global growth fears [are] driven mainly by a significant slowdown in emerging market countries, while the lukewarm recovery in developed nations is not strong enough to counteract weakness in China and other emerging countries.”
For now at least it seems all eyes are on China but this could turn into a pickle that even the might of Beijing cannot fix.
Photo credit: Jerryyang