The Institute of International Finance announced in a report today, Wednesday, that the US economy is expected to avoid entering a recession this year, with inflation nearing the target level, indicating "positive prospects for capital flows into emerging markets." The Institute predicts that Latin America will generally be one of the preferred destinations for foreign investments in emerging markets, despite negative signals coming from Argentina. It expressed doubts about capital fleeing from China, Turkey, and other countries.
The Institute forecasts US economic growth of 1% in 2023, which, combined with predictions that inflation will moderate to 3.1% annually by the end of the year, will create a favorable investment environment in developing countries. According to the Institute’s estimates, foreign capital flows into emerging markets are expected to increase, while outflows of capital are expected to decrease this year, resulting in net capital outflows from emerging markets being reduced to about $173 billion compared to $522 billion in 2022. Excluding China, net capital outflows are estimated at around $80 billion this year after reporting outflows of $221 billion in 2022.
Typically, higher interest rates and tighter monetary policy in developed markets, with the US being the most significant, are not good for emerging markets, as investors favor attractive, guaranteed returns in times of uncertainty, prompting them to withdraw funds from less developed countries. Investors have begun to engage in new activities after China, their recent favorite destination, has faced severe economic slowdown and perceived political risks that have rendered Russia non-investable following its invasion of Ukraine early last year.
The Institute of International Finance expects that net foreign direct investment in China for the entirety of 2023 will reach its lowest level in 18 years. Turning to Africa, the Institute anticipates that Egypt will have to offer significant discounts in its efforts to sell state-owned assets as part of an essential structural adjustment. The key to this adjustment is "adopting a flexible exchange rate system, which the central bank has promoted extensively but has been cautious about."
In Saudi Arabia, it is expected that foreign capital inflows will quadruple annually to $44 billion this year, driven by an increase in foreign currency bond issuance, and inflows into equities are also expected to rise. The Institute added that "preliminary data for the first five months of this year shows that foreign currency bond issuance has already surpassed the total issuance for the entire previous year."
