The Institute of International Finance (IIF) forecasts that capital flows to emerging markets will increase to $903 billion in 2024, a 32% rise from the previous year. This growth is expected to be driven primarily by a recovery in foreign direct investment (FDI) and increased equity portfolio inflows.
Strong Recovery in Investment
The IIF’s report covers 25 emerging market countries, including China, India, Russia, and Mexico. Despite global growth projections of 3.1% for this year, which are below the 3.8% average from 2000 to 2019, the IIF remains positive. “A global ‘soft landing’ scenario supports a favorable outlook for capital flows to emerging markets,” the report states.
Foreign Direct Investment
Net FDI inflows are projected to reach $426 billion in 2024, reflecting growing investor confidence. This substantial increase indicates strategic investments and renewed interest in these economies.
Portfolio Investments
Equity portfolios are expected to attract $259 billion in net flows, up from $161 billion in 2023. This increase is partly due to a modest recovery in China, which has seen significant outflows in the past two years.
Regional Insights
Asia (Excluding China)
Strong macroeconomic fundamentals in Asian markets are expected to drive a substantial rebound in foreign capital inflows. Notably, the inclusion of India in JPMorgan’s benchmark local currency bond index is anticipated to attract additional inflows into Indian government debt, potentially lowering bond yields and supporting the rupee.
Emerging Europe
Despite ongoing FDI outflows from Russia, the region is expected to see positive net flows, driven mainly by increased investments in Hungary.
Africa and the Middle East
The IIF forecasts $149 billion in net non-resident capital flows to Africa and the Middle East, up from $115 billion last year. Egypt, Saudi Arabia, and the United Arab Emirates are predicted to dominate these inflows. For example, Abu Dhabi’s sovereign wealth fund’s investment in a project on Egypt’s Mediterranean coast underscores the region’s growing appeal.
Latin America
Strong capital inflows are also projected for Latin America in 2024 and 2025. The region benefits from its strategic position as a global commodity producer, favorable geopolitical standing, and opportunities arising from global supply chain shifts.
Economic Conditions and Policy Expectations
The IIF’s optimistic forecast is contingent on economic growth in emerging markets and significant interest rate cuts in developed economies. The IIF anticipates a 25-basis-point rate cut by the U.S. Federal Reserve later this year, with the policy rate expected to decrease to 3.7% by the end of next year. Similar rate cuts are predicted for the euro area and the United Kingdom, potentially as early as mid-2024.
Conclusion
The IIF’s projection of $903 billion in capital flows to emerging markets in 2024 highlights the growing investor confidence and strategic importance of these economies. With solid macroeconomic fundamentals and favorable policy conditions, emerging markets are poised for significant financial inflows and economic growth.
