It is very popular in the Western media these days to
exaggerate and sensationalize events in emerging markets. Recent reports in
leading US and UK publications claimed that there was around a trillion dollar capital outflow from emerging
markets in recent months. In reality, the figures were far smaller.
Here is a reality check from investment firm Ashmore Group (The real EM capital outflow story – and why
EM investors need to think for themselves By Jan Dehn and Alexis de Mones)
“Given the scale of
the FX valuation effects it is clear that estimates of capital outflows from EM
that do not take them into account will be hopelessly wrong. Our estimates of
EM capital outflows – after controlling for FX valuations effects – turn out to
be between 3 and 5 times smaller than the estimate in the report. At between
USD 183bn and USD 295bn, depending on the methodology used, EM capital outflows
are still large, but they are by no means catastrophic. They measure between
0.6% and 0.9% of total tradable debt and equity in EM. Alternatively, rather
than being more than twice the size of outflows recorded during 2008/2009 – a
point laboured by the Financial Times – the outflows are in fact significantly
smaller, perhaps as low as half that size. Our estimates of the scale of
outflows also have the merit of being far more consistent with the price
action. In 2008/2009, sovereign debt spreads in EM blew out to 800bps. Today,
spreads are around 400bps. Local bond yields in EM blew out to more than 9.5%
in 2008. Today, yields are about 7% and still below levels seen during the
Taper Tantrum. Last week the Institute of International Finance (IIF) published
an outflow number of just under USD 300bn, based on data for the last four
quarters. This estimate is very close to our own. The IIF concluded, “Don’t
panic! EM capital flows have weakened, but NOT collapsed”. Ignorance and
prejudice about EM are rife. When combined they can become dangerous. When they
fuel misleading, sensationalist media headlines they remind us that there is no
substitute for independent thinking when it comes to EM.”