The International Monetary Fund (IMF) reported that gross capital inflows into emerging markets, excluding China, rose to $110 billion last year, which is 0.6% of their economic output. This marks the highest level since 2018. These findings, part of the IMF’s External Sector Report on currencies, capital flows, and financial imbalances, highlight a certain resilience among emerging markets, despite sharply higher U.S. interest rates attracting funds into dollar assets.
The report noted a decline in the more volatile net portfolio inflows for emerging markets, but net inflows of foreign direct investment (FDI) have remained stable. The IMF attributed this stability to stronger economic fundamentals, including more robust fiscal, monetary, and financial policy frameworks, as well as more effective policy implementation. In contrast, China experienced net capital outflows over the 2022-2023 period, including net negative FDI inflows. This outflow could partly reflect multinational firms repatriating earnings, alongside shifting expectations about Chinese growth and geo-economic fragmentation.
Globally, gross capital inflows fell to 4.4% of global GDP, or $4.2 trillion, in the 2022-2023 period, down from 5.8% of global GDP, or $4.5 trillion, in 2017-2019. The IMF suggested this decline reflects a retrenchment of capital flows, with foreigners buying fewer local assets and residents purchasing fewer assets abroad. The U.S., however, significantly benefited from these shifts, accounting for 41% of global gross inflows during the 2022-2023 period, nearly doubling its 23% share from 2017-2019. Similarly, the U.S. share of global gross outflows rose to 21% from 14% during the same periods.
The report indicated that this shift might reflect increased financial fragmentation and an unwinding of some tax and regulatory strategies by large multinational corporations. Additionally, the IMF revealed that the U.S. dollar’s real effective exchange rate was overvalued relative to U.S. GDP by a median of 5.8% in 2023. The euro was undervalued by 1.7%, the yen was overvalued by 1.7%, and the yuan was overvalued by 0.7%.
The IMF’s findings underscore the complex dynamics of global capital flows and exchange rate valuations. While emerging markets demonstrate resilience amid higher U.S. interest rates, shifts in capital flows and exchange rate valuations reveal the broader impacts of financial fragmentation and multinational corporate strategies.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
