DOHA: A strong rebound in capital inflows to Qatar was the key driver to the overall rise in the non-resident capital flows to a ‘group of 26 countries’ in 2018, estimated at $145bn, up from about $125bn in 2017.
This amounts to over 5 percent of the Frontier Market (FM) GDP—higher than the 3-4 percent we see for larger Emerging Markets…The upturn is due mainly to a strong rebound in flows to Qatar, from outflows of $23bn in 2017 to some $20bn this year, Institute of International Finance (IIF) noted.
IIF’s Frontier Market includes 26 countries, covering five in the Middle East region.Excluding Qatar, non-resident capital flows to these 26-group countries are projected to decline by nearly 20 percent to some $120bn in 2018.
With trade-related tensions a significant headwind for FDI flows across frontier (and EM) markets, IIF forecasts that FDI flows will remain broadly stable at $50bn in 2018—but well below the $68bn seen in 2016.
“We do expect a strong rise in “other investment” flows, from $29bn in 2017 to over $60bn in 2018, again largely reflecting the strong recovery in banking-related flows to Qatar.
However, for other frontier markets these flows are set to decline by some $14bn to $37bn this year,” IIF said.
Reflecting contagion from the broader EM world, fund flows to FM bonds and stocks have tapered off significantly this year.
Following years of robust portfolio debt inflows, there has been a sharp reversal in debt flows in recent months. With central bank liquidity continuing to ebb, IIF now expects nonresident portfolio debt flows to FMs to decline from an all-time high of $30bn in 2017 to $20bn in 2018. It also projects non-resident portfolio equity flows to decline by some $1bn to near $3.5bn in 2018.
Downside risks remain significant. The most immediate risk relates to US-China trade tensions given the strong trading links between China and many frontier economies. Continued escalation could prompt a much more cautious investor stance, weighing on portfolio, banking and trade-related flows to FMs.
Continuing US dollar strength into year-end could push global portfolio allocations still further towards US securities, at the expense of riskier FM (and EM) assets. Commodity price volatility is also a concern: while higher energy prices remain supportive for oil exporters, weakness in agricultural prices could weigh on investment flows to FMs. Political and geopolitical risks remain significant. The upcoming US midterm elections highlight the risk of further protectionist rhetoric and measures, which could prompt still more volatility in EM/FM portfolio and banking flows.
Further US sanctions, including on Russia and Iran, would represent another important downside risk, particularly for cross-border trade and banking flows.
