IIF Capital Flows Report 10 15

Capital Flows to Emerging Markets
OCTOBER 1, 2015
Capital flows to emerging markets have weakened sharply in recent months.

With non-resident inflows looking likely to fall below 2008 levels and rising
resident outflows, we now expect that net capital flows to EMs in 2015 will be
negative for the first time since 1988 (Chart 1).
Unlike the 2008 crisis, the pullback from EMs has been driven primarily by internal
factors, basically reflecting a sustained slowdown in EM growth and amplified
by rising uncertainty about Chinas economy and policies.
We project only a moderate rebound of EM capital flows in 2016 as structural
factors continue to weigh on EM growth prospects.
Monetary policy divergence in mature markets could contribute to market
volatility as the Fed starts to raise rates. The possibility of further RMB weakening
is another potential source of risk.
Countries most in jeopardy from EM turbulence include those with large current
account deficits, questionable macro policy frameworks, large corporate FX
liabilities, and acute political uncertainties. Brazil and Turkey combine these
features.
From a markets perspective, EM equity valuations have fallen to very low levels,
but near-term downside risks are high enough to keep investors cautious, absent
a clear catalyst for re-entry. Risks for EM corporate bond markets remain
elevated, especially given substantial corporate foreign currency exposures as
well as pressure on earnings.
DEEPENING DROUGHT IN 2015

Capital flows to emerging markets have weakened markedly this year, after a
substantial decline in 2014. We estimate that net non-resident inflows will reach
only $548 billion in 2015 down from $1,074 billion last year, sinking below levels
recorded in 2008/09. As a share of EM GDP, such inflows have fallen to about 2%
Chart 1
Capital Flows to Emerging Markets, Annual Data
$ billion; resident capital outflows exclude reserves
1300
Non-Resident Capital Inflows
1100
Resident Capital Outflows
900
700
500
300
100
-100
-300
-500
Net Capital Flows
-700
(Financial Account Balance)
-900
-1100
-1300
1995
2000
2005
Source: IIF.
iif.com Copyright 2015. The Institute of International Finance, Inc. All rights reserved.
IIF Forecast
2010
2015
This report is the result of the

collective efforts of the IIF
Economics and Capital
Markets staff. All contributors
are listed on the back cover.
Questions and data requests
can be submitted to
capitalflows@iif.com.
Table of Contents
Deepening Drought
Prospects for 2016
EM Equity Valuations
EM Corporate Debt
Concept of EM
Emerging Asia
Emerging Europe
Latin America
Middle East
Sub-Saharan Africa
Tables and Annex
Contributors
1
7
11
16
20
23
25
27
29
30
31
38
As a share of EM
GDP, capital
inflows have fallen
to about 2% from
a record high of
almost 8% in 2007
CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015
page 2
from a record high of almost 8% in 2007. Moreover, resident outward investment

flows have also accelerated amid the recent turbulence in global financial
markets, putting further downward pressure on EM reserves, exchange rates and
asset prices (see our September 2015 Global Economic Monitor and Capital
Markets Monitor). Taken together, we expect net capital flows1 for our group of 30
EM economies to be negativeon a calendar year basisfor the first time in since
1988, with net outflows projected at $540 billion (Table 1).
On the face of it, the sharp decline in nonresident capital inflows is reminiscent of
the 2008/09 financial crisis. However, the underlying factors leading to the
pullback are fundamentally different. This years decline has been driven by a
sustained slowdown in EM growth, and in particular by uncertainty about Chinas
economy amid continuing concerns about the impact of the Feds eventual turn
to raise U.S. interest rates. By contrast, back then the collapse in capital flows
reflected a sudden financial crisis and deep recession in mature economies that
spilled over rapidly to emerging markets. The 2008/09 crisis triggered a broadbased sudden stop event after years of strong capital inflows, expressed in a
massive reversal of banking and portfolio flows. By contrast, this years slowdown
represents a marked intensification of trends that have been underway since
2012, making the current episode feel more like a lengthening drought rather than
a crisis event (Chart 2).
While all regions have experienced weaker inflows, it is noteworthy that a large
part of the decline in overall flows this year is attributable to flows out of China
(Chart 4), which intensified after the PBOC announced a mini-devaluation of the
RMB and a shift to a more market-oriented exchange rate fixing regime in August.
Chart 2
IIF EM 30: Non-Resident Capital Inflows by Component
$ billion
Inward - Other
450
Inward Portfolio Debt
400
Inward Portfolio Equity
350
Inward FDI
IIF Forecast
300
250
200
150
100
50
0
-50
-100
-150
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
Source: National Sources, IMF, IIF.
1 Net
capital flows as measured by the financial account balance of the balance of payments, i.e. excluding official reserve accumulation.
Capital outflows in
2015 feel more
like a lengthening
drought than a
classic sudden
stop
page 3
Table 1
Emerging Market Economies: Capital Flows
$ billion
2013
2014
2015 Est.
1305
1074
548
776
1273
1032
484
727
663
579
683
586
561
535
599
503
84
98
26
96
Commercial Banks
610
173
349
164
-77
-134
129
17
Nonbanks
437
185
57
112
Official Inflows
33
42
65
48
International Financial Institutions
-3
13
28
24
Bilateral Creditors
36
29
37
24

Private Inflows
Equity Investment
Direct Investment
Portfolio Investment
Private Creditors
2016 Proj.
-1527
-1164
-748
-1013
-986
-1043
-1089
-1082
Equity Investment Abroad
-421
-403
-409
-434
Resident Lending/Other
-566
-640
-680
-648
-541
-121
341
68
-222
-89
-199
-238
319
32
-540
-306
-9
-137
231
226
199
238
Private Outflows
Reserves (- = Increase)
Net Capital Flows incl. Reserves
Net Capital Flows excl. Reserves (Financial Account Balance)
Memo:
Net Errors and Omissions
Current Account Balance
Source: IIF. See page 37 for guidance on how to interpret these data.
On a component basis, portfolio flows account for a significant portion of the

recent drop in EM capital flows. Portfolio equity and debt flows saw a sharp
reversal over the summer in the context of a precipitous EM stock market selloff
(Chart 3). We estimate that outflows of portfolio capital in 2015Q3 amounted to
$40 billion, the worst quarter since 2008Q4 at the height of the global financial crisis
(Charts 4 to 6, see also our September 2015 Portfolio Flows Tracker and Flows Alert).
But even before this recent turbulence, portfolio flows had been on a downward
trend for several months. In light of these developments, we have slashed our
projections for 2015 portfolio flows to $26 billion for equity flows (from $144 billion
projected in May) and $109 billion for debt flows (from $193 billion).
Chart 3
EM vs. Mature Equities
index (in 100), both scales
18
Mature
16
12
14
10
12
10
EM
8
6
8
6
2007
14
2013
Source: MSCI, Bloomberg, IIF.
However, the component that has been most affected by recent market volatility
is bank lending. Our latest projections look for commercial banks to reduce crossborder exposure to EMs by $134 billion on net in 2015, led by repayments of dollardenominated loans by Chinese corporates after years of heavy offshore
borrowing. In addition, Russia is projected to see a further reduction in foreign
bank credit to the tune of $22 billion this year, after years of heavier retrenchment.
Meanwhile, after being resilient since the crisis, FDI inflows are also showing signs of
a modest decline, and are projected to dip to $535 billion this year from $586
Chart 4
Non-Resident Capital Inflows to Emerging Markets
EM Asia ex. China percent
$ billion China
MENA
Latin America
1500
10.5
EM Europe
IIF
Total, Percent of
Forecast 9.0
1200
EM GDP
7.5
900
6.0
600
4.5
3.0
300
1.5
0
0.0
-1.5
-300
2005
2010
2015
Source: IIF.
page 4
Chart 5
Equity and Debt Non-Resident Portfolio Flows to EMs
$ billion
Debt
Equity
150
125
100
75
50
25
0
-25
Official Quarterly
-50
Balance of
Monthly Tracker
-75
Payments Data
(Quarterly Aggregate,
Through Q4 2014
-100
Q3 = Preliminary Estimate)
-125
2008 2009 2010 2011 2012 2013 2014 2015
Source: IIF.
billion in 2014, in part reflecting cutbacks in spending on commodity-related

infrastructure projects in the wake of steep commodity price declines.
The factors that are driving inflows lower this year are not new, but rather reflect
an intensification of recent trends. Both pull and push factors have had an
adverse effect on EM capital flows. On the pull side, weaker growth in emerging
economies has rendered their asset markets a less attractive investment
destination. Over the past few years, EM growth has declined, both in absolute
terms and relative to growth in mature economies, but that trend has intensified
this year with the China slowdown and the downturn in the commodity price
cycle deepening (Chart 7).
On the push side, concern about spillover effects from Fed liftoff has contributed
to uncertainty and market volatility as U.S. labor markets tighten progressively,
notwithstanding continued dovish messages from the Fed that policy rate
increases would be gradual and data dependent. These messages have
Chart 6
Total Portfolio Flows
$ billion
55
45
Africa & Middle East

Emerging Europe
Latin America
Emerging Asia
35
Chart 7
EM GDP Growth and EM Non-Resident Capital Inflows
percent, q/q, saar
$ billion
IIF Forecast
300
5.0
4.5
25
15
4.0
5
-5
250
EM GDP Growth
4-Quarter MA
Total Capital Inflows
4-Quarter MA
200
3.5
150
-15
-25
Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15
Source: National Sources, Bloomberg, IIF.
3.0
12Q4
13Q4
14Q4
Source: National Sources, IMF, IIF.
15Q4f
16Q4f
100
page 5
contributed to repeated downward revisions in market expectations of the Feds
Chart 8
Dec 2016 Fed Funds Futures
percent per annum
2.00
policy trajectory (Chart 8). At the same time, the ECBs launch of full-scale
quantitative easing has provided some offset, particularly for EM Europe borrowers
with established access to euro funding.
1.75
1.50
Turbulence From China
1.25
These fundamental factors weighing against capital flows to emerging markets
1.00
were exacerbated by a sharp increase in risk aversion in financial markets over the
0.75
summer months (Chart 9). Unlike the 2013 taper tantrum that was triggered by a
0.50
Jan 14 Nov 14 Sep 15
shift in perceptions about the Feds policy trajectory, this episode originated in the
Source: Bloomberg, IIF.
announcement by the PBOC that it would shift to a more market-oriented

approach to setting the exchange rate, along with a 2% devaluation of the RMB/$
exchange rate fix. This unexpected policy shift followed months of weakening
Chart 9
Market Volatility
index
basis points
850
90
VIX
80
70
BBB
650
Spread
60
50
450
40
30
250
20
Chinese activity data and a stock market crash, all of which raised serious
question marks about Chinas growth path and policy reactions. As well as
prompting an intensification of capital outflows from China itselfparticularly by
corporates overexposed to dollar liabilitiesEMs suffered more broadly,
particularly Chinas closest trading partners and commodity producers reliant on
Chinese demand.
For some countries at least, recent movements in asset prices are approaching
10
0
2006
crisis dimensions. For example, EM exchange rates have dropped sharplyand

total currency depreciation since the start of the year for countries including Brazil,
2010
2014
50
Ukraine, Turkey, and Colombia now exceed the 25% threshold commonly used to
identify an external crisis (Chart 10).1 These movements have raised concerns
about stress levels for corporates with heavy FX exposure. However, in general EMs
look more resilient to a classic capital account crisis given flexible exchange rates,
higher reserve levels, and improved public sector balance sheets.
Chart 11
Correlation across EM Sovereign Bond Spreads
average 30-day rolling correlation between percentage
change in EMBIG EM spreads and country-specific spreads
for 17 EMs
Post-2008
0.9
Crisis Average
Chart 10
YTD Change in Spot FX Rates vis--vis the USD
percent
-10
0.8
-25
0.7
-40
0.6
Egypt
Korea
Thailand
Mexico
Chile
Indo
S. Africa
Argentina
Malaysia
Colombia
Turkey
Ukraine
Brazil
-55
1 Frankel,
0.5
0.4
2008
Pre-2008
Crisis Average
2009
2010
Jeffrey A. and Andrew K. Rose. 1996. Currency Crashes in Emerging Markets: An Empirical Treatment," Journal of International Economics, November 1996, 41 (3-4), 351-366.
2011
2012
2013
2014
2015
page 6
During recent months, correlations across EM bond markets increased sharply

(Chart 11), suggesting a low degree of investor differentiation as is typical during
surges in risk aversion. Taking a somewhat longer perspective, however, signs of
investor discrimination become more visible. For example, in the bond market the
increase in individual countries EMBIG spreads over the past four months shows a
high correlation with EM vulnerability as measured by our September 2015 Heat
Map (Chart 12). Investors have focused in particular on countries external
vulnerabilities as well as domestic leverage (not least reflecting concerns about
high corporate indebtedness, see page 16) and political strains in several
countries.
Rising Resident Outflows, Falling Reserves
Adding to the gloom, lower nonresident inflows to EMs have been coupled with
sharply rising outflows by residents. We project private outflows (i.e. excluding
reserves) to increase to $1,089 bn this year, a historical high. The rise in outflows is
mainly in the form of portfolio equity and, in particular, resident lending, notably
Resident capital
outflows have
also risen sharply
out of China. On a net basis, lower inflows and rising outflows imply that private
capital is leaving EMs for the first time since the early 1980s.
Negative net capital flows have been coupled with a sharp swing in EM reserves.
After having accumulated reserves to the tune of $500 bn per year on average
over the last five years, we project that 2015 will see a decline in the aggregate
EM reserve position by $342 bn. The swing reflects the fact that many countries
are selling reserves to support depreciating currencies in the face of rising private
capital outflows. The shift is particularly large in China, after years of heavy
reserve accumulation (Chart 13). The MENA countries have also begun to sell FX
reserves as current account positions are turning into deficit amidst lower oil
prices (Chart 14; see page 29).
Chart 12
IIF Heat Map Vulnerability Measures vs. EMBIG Spreads
change in EMBIG spreads since mid-May 2015
275
250
BR
225
200
175
150
CO
CL ID
MY
125
ZA
TR
100
MX
PE
75
PH PL
50
RO IN
avg. of domestic, external, policy
HU
25
CN RU
vulnerability indices in April*
0
0.3
0.4
0.5
0.6
0.7
*A higher value implies higher vulnerability. Source: IIF, Bloomberg.

Chart 13
EM FX Reserve Accumulation by Region
EM Europe
$ billion
Latin America
1,400
Middle East/Africa
1,200
EM Asia excl. China
1,000
China
IIF
Forecast
800
EM
600
400
200
0
-200
-400
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: IIF.
Chart 14
EM Resident Capital Outflows Composition
Resident Lending
$ billion
2,000
Reserve Accumulation
page 7
Chart 15
GDP Growth: Emerging Markets
percent y/y
8
2004-2014
Average
1,600
6
1,200
800
400
2
0
-400
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: IIF.
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: IIF.
PROSPECTS FOR 2016ONLY A SLOW TURNAROUND

Looking ahead, an important implication of our analysis is that flows are unlikely to
rebound swiftly, as they did in 2010. Instead, the recent drought is likely to be
protracted as EM growth remains well below trend and monetary policy
divergences remain a concern. In sum, we expect only a moderate recovery in
flows next year, with risk remaining on the downside.
The recent
drought in capital
flows is likely to
be protracted
End of an EM Growth Supercycle

Emerging market growth performance has deteriorated markedly over the past
five years, reflecting a weakening of fundamental drivers as well as cyclical
factors. In our September 2015 Global Economic Monitor, we projected EM
growth to reach only 3.5% this yearless than half of that of 2010, and the lowest
since the 2008/09 financial crisiswith only a modest revival to 4.2 % in 2016, a
rate still well below the average of the past ten yearsnotwithstanding solid
growth momentum in the mature economies (Charts 15 and 16). As a result, we
have marked down our forecasts for EM growth significantly relative to our May
2015 Capital Flows Report, by almost 0.5pp this year and 1pp for 2016 (Chart 17).
As discussed in the September GEM, a number of structural developments are
now weighing on EM growth performance, implying a likely end to the EM
growth supercycle that we have witnessed over the past twenty years or so. At
the core of the problem are diminishing returns from an export oriented growth
model, in which reduction of trade barriers and introduction of new technologies
allowed rapid growth through integration of EMs labor forces in global
manufacturing supply chains. The rising importance of the less easily tradable
services sector in the mature economies has further dampened world trade and
EM export opportunities, while the onset of population aging in many EMs implies
less favorable demographics.
EM growth
supercycle
coming to an end?
Chart 16
Growth differential: Emerging Markets - Mature Economies
percentage points
6
IIF
Forecast
5
page 8
Chart 17
Forecast Revisions to GDP Growth Relative to May CFR
percentage points
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2015
2016
-2.5
0
2000 2002 2004 2006 2008 2010 2012 2014 2016f
Source: IIF.
Source: IIF.
China has been notably affected by this shifting dynamic. Chinese growth has
slowed markedly since 2011, and while policy makers have developed an
ambitious agenda to transform their economy, they have struggled to advance
reforms while also meeting growth targets. Fears of a rapid slowdown or even a
hard landing have been exacerbated by the volatile correction in the stock
market over the summer, weakening growth indicators and the surprise minidevaluation of the currency in mid-August. The government increasingly faces a
policy trilemmaas it tries to stabilize its exchange rate and ease monetary policy
with an increasingly open capital accountand this has raised concerns about
how tensions will be resolved (see our September 2015 Update from Beijing).
The many emerging market commodity exporters have also faced particular
strains as their exports have been damaged by sharp price corrections as global
demand prospects have been scaled back. Commodity prices remain at very
low levels and, importantly, there is a growing sense that oversupply is likely to
keep prices low for the foreseeable future. Many countries will need to go through
difficult adjustments, to rein in fiscal accounts and to foster more diversified
economies. The sharp downward revision of our projections for Latin America is a
case in point.
Living With Monetary Policy Divergence
In recent years, monetary policy divergence across the major advanced
economies has been a key driver of movements in mature market exchange and
interest rates. Next year is likely to see increasing divergence as the Fed and BOE
raise policy rates, while the ECB and BOJ are likely to extend their QE programs to
ensure that inflation rises towards their targets. Against this background, in 2016
we expect to see continued market volatility and cautious investor appetite for
EM assets, which could be further exacerbated by uncertainty about Chinas
exchange rate management.
Weak commodity
prices will require
more countries to
go through
difficult
adjustments
page 9
Chart 18
Latest FOMC Dot Plot, Market Expectations, IIF Forecast
percent
FOMC Dot Plot as of 9/2015
6
IIF Forecast
5
4
3
2
Path of 2004
Hiking Cycle
Market Exp. as of 9/29/2015
0
-1
2015
2016
2017
2018
Source: U.S. Federal Reserve, Bloomberg, IIF.
Specifically for the Fed, our baseline is for the first rate hike to occur in December
this year, followed by a gradual path of subsequent rate increases that should
bring the federal funds rate to around 1%-1.25% by the end of next year (Chart
18). In the initial stages, we expect a moderate negative impact from the Feds
rate increases on EM capital flows, notably portfolio flows. However, once the
initial two rate hikes are out of the way, the adverse impact from Fed tightening
should moderate as uncertainty diminishes.
Our capital flows forecasts assume that the FOMCs approach will continue to be
very dovish. However, we remain concerned that as the U.S. cycle matures,
inflation pressures may start to build and a more rapid pace of rate increases will
be called for. An abrupt upward adjustment in the markets expectation of the
Feds trajectory could lead to sharp movements in rates that could be very
disruptive for emerging markets and would likely spark a further retrenchment of
portfolio investment.
Gradual Recovery But Risks Continue to Loom
Based on this analysis of the global environment as well as our country-by-country
assessments, we project a moderate recovery of capital flows to emerging
markets in 2016. Total net capital flows would remain negative at $306 billion for
the year, while non-resident inflows would pick up to around $776 billion. These
figures represent a substantial reduction relative to our May CFR, but is noteworthy
that net non-resident inflows would remain positive and thus a source of EM
external financing even in these volatile times.
The modest uptick in private inflows for 2016 is visible across all regions, in line with
our projection of a slight rebound in EM growth. Banking flows as well as both
portfolio equity and debt are envisaged to benefit, while FDI inflows may see a
Our capital flows

forecasts assume a
dovish Fed
page 10
further small decline, not least because commodity prices are likely to remain at
low levels.
Despite substantial downward revisions to our baseline projections, downside risks
remain a concern. As flagged above, a steeper path for rate hikes by the Fed
than assumed under our baseline scenario continues to be a tangible risk, as an
abrupt adjustment in market expectations could lead to a spike in rates and a
surge in risk aversion that would have a sizeable negative impact for the more
volatile portfolio flows in particular (see May 2015 Capital Flows Report). This risk
has arguably increased after the September Fed meeting, which not only
delayed liftoff but also lowered the expected path of future rate hikes by FOMC
members. It will thus be important to continue closely monitoring U.S. data for signs
of labor market tightening and incipient wage and price pressures.
Countries that would be particularly affected by a sharp jump in rates and
Despite
substantial
downward
revisions to our
baseline
projections,
downside risks
remain a concern
accompanying volatility and risk aversion include those with sizeable current
account deficits, questionable macroeconomic policy frameworks, large
corporate open FX positions, and political uncertainties that could hinder a
forceful policy response to rising stress (see our September 2015 Heat Map). Brazil
and Turkey are two countries that combine these features.
An alternative scenario, discussed in our May CFR, is that inflation remains muted
but in the context of sluggish U.S. demand growth and more in line with current
market thinking. In this case, FOMC tightening could be on the slower trajectory
now priced in by the market with only two rate hikes priced in before end 2016,
but any positive effect from lower rates under such a scenario would be limited by
the weaker growth momentum in the U.S. economy.
We also see more downside risks on the EM side. While we expect some overall
rebound in EM growth next year, this forecast factors in continued mild further
slowing in China and some stabilization in Brazil and Russia. Most worrying, rising
concern about a more abrupt slowdown in China or more rapid RMB
depreciation would have repercussions for prospects across EMs. Our baseline
projections assume that Chinese policymakers are successful in stabilizing
expectations about the RMB and can dial back their market intervention
accordingly. However, continuing disappointing growth performance in China
could lead to rising expectations of a policy shift towards allowing the RMB to
depreciate against the dollar. Such a course would have a particularly
dampening impact on East Asian trading partners and commodity exporters,
particularly if accompanied by another spike in risk aversion as occurred in August
this year.
Continuing
disappointing
growth
performance in
China could lead
to rising
expectations of a
policy shift
towards allowing
the RMB to
depreciate against
the dollar
page 11
EMERGING MARKET EQUITY VALUATIONS: CHEAP ENOUGH FOR RE-ENTRY?

The decline in global investors appetite for emerging market stocks over the past several
EM equities are at
allocations suggest that EM stocks today account for just 12% of global investors portfolios, very low
valuation levels...
more than 8 percentage points lower than in 2010 (Chart 19). Weakening trend growth,
years has been quite striking. Indeed, trends in mutual fund and ETF investors portfolio
disappointing corporate earnings, higher corporate debt levels (see below), falling
commodity prices, emerging geopolitical risks and in many cases domestic political
tensions have all reduced the appeal of EM equities. This lack of investor appetite has of
course also been reflected in lower stock market valuations. A range of valuation metrics
suggest that many EM equity markets have become cheaper still in 2015, and are
increasingly undervalued compared to 10-year averages.
Price-to-book ratio: The benchmark MSCI EM equity index was trading on a price-to-book
ratio of around 1.3x as of mid-September under half of its peak value in 2008 and close to
the levels seen during previous stress episodesthough still well above levels seen during
the 1997/98 Asian crisis (Chart 20). Perhaps the most striking feature of recent years has
been the dramatic de-rating of EM equities relative to their mature market peers (Chart
21). Although price-to-book ratios are typically not seen as a reliable predictor of shortterm future returns, lower price-to-book ratios have generally been followed by high
...but investors
have become
increasingly
doubtful about
earnings growth
potential
nominal returns over a longer-term horizon as suggested by the negative correlation

between price-to-book ratios and cumulative returns over the subsequent 5-years (Chart
22).
Trailing and forward price/earning ratios: The trailing 12-month price/earnings ratio of the
MSCI EM index is also below its long-term average. However, this metric should be
interpreted with caution as indicator of valuation, as higher readings could reflect lower
earnings, rather than higher stock prices and vice versa. For instance, the P/E ratio of the
MSCI EM index hit record highs during previous EM stress episodes when the decline in
earnings was much larger than the decline in equity prices (Chart 23).
Another commonly used metric that reduces this problem somewhat is the forward P/E
Chart 19
Emerging Markets: Fund Portfolio Weights, by Asset Class
% of global bond/equity allocations, dashed line: 08-15ytd avg.
14
22
Bonds
20
11
16
10
2005/15 YTD Avg.
2.5
2.0
1.5
14
12
3.0
13
12
18
Chart 20
Emerging Markets: Price-to-Book Ratio
ratio, MXEF index
Equities
10
2008 2009 2010 2011 2012 2013 2014 2015
8
7
6
Source: EPFR, IIF estimates; includes mutual funds and ETFs.

1.0
0.5
9/11
Gulf War
Asian
Crisis
0.0
1995
2008 Crisis
1995-15 YTD Avg.

2000
2005
2010
2015
Chart 21
EM vs MM: Relative Price-to-Book Ratio
relative ratio
1.4
EM Relatively More
Expensive than MM
1.2
2005-2015
YTD Avg.
page 12
Chart 22
Price to Book Ratio and Cumulative Stock Market Returns
x-axis: price-to-book ratio of MXEF index
y-axis: cum. noninal returns on MXEF index over the next 5yrs
275
1.0
175
0.8
125
0.6
75
25
0.4
1995-2015
Average
0.2
0.0
1995
Low levels of P/B ratio

have generally been
followed by high
nominal returns of the
MXEF index over the
next five years.
225
-25
-75
2000
2005
2010
2015
0.8
1.2
1.6
2.0
2.4
2.8
3.2
Source: Bloomberg, IIF. Based on monthly return data betwen

Jan. 2001 and Aug. 2015 .
ratio, based on projections of next years earnings. This ratio stands very close to its long
term averagethough it has fallen since early summer. Interpretation of this ratio also
requires a careful analysis of price and earnings dynamics. The recent decline in the
forward P/E ratio has been mainly driven by the drop in stock prices, with a more modest
decline in estimated 12-month forward earnings partly offsetting the sharper decline in
prices in the numerator. The drop in P/E ratios has been much more modest than the
decline in stock prices, implying that adjustment of prices has broadly kept pace with the
downgrades to earnings forecasts.
Both variations on the P/E ratio point to growing doubt about EM firms earnings capacity
The EM valuation
discount to
mature markets is
the largest since
2006
in the current environment. In particular, EM earnings growth forecasts have fallen very
sharply over the past year (Chart 24), to levels last seen in 2009. Moreover, the EM
valuation discount to mature markets is the largest since 2006 (Chart 25), effectively
erasing the re-rating that had left them trading roughly in line with mature markets
between 2007-2011.
Chart 24
EM Forward Earnings Growth
percent, y/y, MSCI index, 12m forward
60
Chart 23
Emerging Markets: Price/Earnings Ratio
ratio, MXEF index
The sharp rise in P/E ratio
40
during the stress episodes
reflects the marked
35
decline in earnings.
30
50
40
30
+1.5 Std. Dev.
25
20
10
20
95-15 Avg.
15
0
-10
10
-20
-30
0
1995
-1.5 Std. Dev.

2000
2005
2010
2015

-40
2005
2010
2015
Chart 25
EM vs MM: Relative Forward Price-Earnings Ratio
relative ratio, MXEF vs MXWO index
EM Relatively More
1.1
Expensive than MM
1.0
0.9
page 13
Chart 26
CAPE: Cyclically Adjusted P/E Ratio (Shiller P/E Ratio)
ratio, dashed lines show 2005-2015ytd average
30
28
26
24
0.8
Mature Markets
22
0.7
20
18
0.6
16
2005-2015
Average
0.5
0.4
14
12
0.3
10
0.2
2005
2010
2015
8
2005
Emerging Markets
2007
2009
2011
2013
2015
Cyclically-adjusted price/earning ratio (CAPE): Our newly developed CAPE measure, the
ratio of current stock prices to average inflation-adjusted earnings over the previous ten
years, highlights that cyclically-adjusted valuations have been steadily declining since
early 2011.1 In August 2015, EM CAPE ratios hit their lowest level on record (Chart 26).
Although time series data are limited, lower CAPE ratios also appear to be associated with
higher returns over subsequent 5-year term (Chart 27). However, CAPE ratios (which aim
to smooth over the business cycle) reveal greater differentiation across countries and
sectors than do price/book ratios:
Although CAPE valuations are below their historical averages in all emerging
market regions, EM Asian stocks have sustained valuations better than other EM
regions (Chart 28). This is particularly noticeable relative to Latin American
equities, where CAPE valuations had been very similar to EM Asian markets prior to
2013. That said, the decline in real valuations during the summer of 2015 was more
Chart 27
CAPE Ratio and Cumulative Stock Market Returns
x-axis: cyclically adjusted P/E ratio of MXEF index
y-axis: cum. real returns on MXEF index over the next 5 years
Low levels of CAPE
ratio have generally
been followed by
high real returns of the
MXEF index over the
next five years.
100
80
60
40
20
0
-20
-40
-60
-80
-100
Chart 28
Cyclically Adjusted P/E Ratio, by Region
ratio
40
35
EM Asia
30
25
LatAm
20
15
10
5
8
10
12
14
16
18
20
22
24
26
28
30
Source: Bloomberg, IIF. Based on monthly return data betwen

Jan. 2005 and Aug. 2015.
1
0
2005
EM Europe
2007
2009
2011
2013
2015
Following the same methodology proposed by Campbell and Shiller (2001), we compute the EM CAPE as a ratio of inflation-adjusted stock prices
stocks to the average of inflation-adjusted earnings over the last ten years.
page 14
pronounced in EM Asia, largely driven by the Chinese equity market correction,
One key question

is whether EM
equity valuations
Across the countries in our sample, the Philippines is the only country where the
are likely to
stocks are more richly valued by the CAPE metric relative to their own historical
average (albeit only modestly), and relative to other emerging markets (Chart 29). decline further
still over the short
The CAPE ratio remains close to its historical average in South Africa and Turkey,
to medium term
while for most other countries in our sample, valuations have fallen far below 10which brought Chinas CAPE ratio from 16.2x to 11.5x.
year averages. Notably, the deviation from long-term averages is particularly

pronounced in commodity exporting countries, such as Colombia, Chile, and
Brazil--reflecting the particular concerns about prospects for earnings and profit
margins for their exporters.
On a sectoral basis, valuations are also well below historical averages across all
sectors (Chart 30), with the most marked gaps in materials (65% below their longterm average), energy (60%) and financials (50%).
Although on these and other similar metrics, EM equity market valuations are at low levels
relative to past values, one key question is whether these valuations are likely to decline
further still over the short to medium term. Although investors will focus on firm-specific
factors (default history, currency composition of revenues, global exposure of firms, etc.)
when deciding on desired exposure to emerging markets, the key drivers will include
prospects for better earnings growth performance and for changes in risk evaluation.
Growth expectations: Disappointing corporate earnings have been a striking feature of
emerging markets over the past four years, suggesting that this years decline in prices
broadly brought them back in line with the underlying loss of earnings momentum.
Relative to mature markets, where valuations rose sharply between 2012-2015, emerging
market P/E ratios had not seen the same runupmeaning less need for a correction in
valuations. Thus, a positive change in the outlook for corporate earningswhether
Chart 29
Cyclically Adjusted P/E Ratio, by Country
ratio
35
2005-15 Avg.
30
Latest
Chart 30
Cyclically Adjusted P/E Ratio, by Sector
ratio
35
2005-15 Avg.
25
Latest
20
20
15
15
10
10
Philippines
India
S. Africa
Indonesia
Malaysia
Thailand
Mexico
Morocco
Chile
China
Korea
Poland
Colombia
Peru
Czech Rep.
Turkey
Hungary
Argentina
Brazil
Russia
30
25
through better export prospects on the back of stronger demand from China or
mature markets, some recovery in commodity prices, or positive structural changewill
be needed to prompt improvement in valuations.
Relative valuation as U.S. rates normalize: As low rates boost the present value of
expected cash flows and thus the price of underlying assets, ultra-low global rates
have been supportive for stock prices and thus valuations since 2008. However, as the
relevant risk-free discount rate (say U.S. 10yr bond yields) for global equities rises, it will
weigh against valuations across the board. Moreover, currency weakness has already
page 15
A positive
change in the
outlook for
corporate
earnings will be
needed to prompt
improvement in
valuations
prompted many central banks in emerging markets to raise policy rates (Chart 31),
particularly in Latin America and to a lesser extent in Emerging Europeanother
headwind to EM equity prices. That said, while rising U.S. rates will of course have an
impact across asset classes, EM equity valuations are sufficiently low relative to
Chart 31
alternative assets (e.g., mature markets or HY bonds) that there may be less downside.
EM Policy Rates
percent
Emerging risks and uncertainties: Dollar strength and rising risk premia are likely to
13
constrain the upside for EM valuations in the near term:
12
11
As U.S. dollar appreciation is typically associated with lower cyclically-adjusted
LatAm
10
EM valuations, the prospect of weaker EM currencies in the context of rising
U.S. interest rates could prompt further downward pressure (Chart 32).
8
7
Given the sharp buildup in EM corporate indebtedness in recent years, both in
local currency and foreign currency, investors could demand higher risk
premiums (see page 16). As still-higher risk premia would also feed through into
higher risk-adjusted discount rates, this would be another headwind to the

present value of future cash flows, weighing on equity prices and valuations.
In sum, EM equity valuations are at low levels compared to past values, but near-term
downside risks are high enough to keep investors cautious about re-entry.
Chart 32
Correlation Between EM CAPE and Selected Variables
Price-to-Book
ratio
ROA
ROC
ROE
Nominal interest rates
Profit Margin
EBITDA, %q/q
Industrial production, %q/q
P/E ratio
Real interest rates
Consumer prices, %y/y
Net debt/EBITDA
USD, REER, %q/q
LC debt/EBITDA
Gross debt/EBITDA
FC debt/EBITDA
-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1

Statistically Significant at 0.01 Level
Statistically Significant at 0.1 Level
Statistically Insignificant
EM Asia
3
2007
EM
Europe
2011
2015
page 16
NON-FINANCIAL CORPORATE DEBT IN EMERGING MARKETS: RISING STRAINS

Since our May CFR report, we have enhanced our EM non-financial corporate debt
database by adding more countries with longer historical data series. Our new
database comprises 18 emerging market economies and tracks the debt figures on
a quarterly basis starting from 1995Q1. Increasing concerns about FX-denominated
debt have also prompted us to dig more deeply into the currency breakdown of
corporate debt figures, mainly based on national sources on domestic bank lending
and the BISs newly extended series on debt securities and cross-border bank
lending. This special section describes our new EM non-financial corporate
database.
Non-financial corporate indebtedness has increased more than five-fold over the
past decade, surpassing $23.7 trillion (nearly 90% of GDP) in early 2015 (Chart 33).1
The debt buildup has been particularly pronounced since the 2008/9 crisis as many
Chart 35
Type of Credit
percent of total
100
90
80
70
60
50
Bonds
40
Cross-border loans
30
Domestic credit
20
10
0
2005 2010 2015
emerging market corporates took advantage of monetary policy easing and ultralow interest rates to raise debt in both local and foreign currency.
Almost all of the countries in our sample have seen an increase in debt-to-GDP
ratios, but the increase has been mostly concentrated in emerging Asia, with the
debt-to-GDP ratio increasing to 125% in 2015Q1 from around 100% in 2010Q4 (Chart
34).
The development of EM corporate bond markets and greater accessibility of bond
market financing has contributed to the buildup in debt. Indeed, the share of bond
market financing in total corporate funding has risen from below 10% a decade ago
Source: BIS, IIF.
to 16% in 2015Q1 (Chart 35).
Chart 34
Emerging Markets: Non-Financial Corporate Debt
percent of GDP
Chart 33
Emerging Markets: Non-Financial Sector Debt
percent of GDP
140
90
80
120
Non-Fin Corporates
70
60
80
50
Government
40
60
EM Europe
40
30
20
EM Asia
100
Households
10
1995
2000
20
2005
2010
2015
Source: BIS, IIF.
0
1995
Source: BIS, IIF.
1999
1
Our sample includes Argentina, Brazil, China, Czech Republic, Hong Kong, Hungary, India, Indonesia,
Korea, Malaysia, Mexico, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand, and Turkey.
LatAm
MENA
2003
2007
2011
2015
Corporate sectors in Hong Kong, Singapore, China, Turkey and Brazil have
recorded the largest increases (Chart 36). Hungary is the only country in our sample
witnessing a decline in its corporate-debt-to-GDP ratio during this time period.
While the currency breakdown of debt differs significantly across countries, the rise
in foreign currency-denominated debt has been marked in the aftermath of the
global financial crisis. Foreign currency-denominated debt rose from 12% of GDP in
2008 to 16% of GDP in 2015Q1, and now accounts for close to 18% of all nonfinancial corporate debt in emerging markets. Of note, the bulk of the rise in
page 17
Foreign currencydenominated
debt now
accounts for
close to 18% of
all non-financial
corporate debt in
emerging markets
foreign currency-denominated debt was attributable to USD debt--which has

reached 12% of GDP (or $3.3 trillion) in 2015, up from 8% in 2008 (Charts 37 and 38).
The sharp depreciation of EM currencies against the U.S. dollar so far this year has
implied a considerable deterioration of corporate balance sheets with open FX
positions. To give a sense of the magnitude, Chart 39 shows the gross increase in
non-financial corporate debt relative to GDP due solely to bilateral exchange
movements against the dollar this year (although this does not take into account
that to some extent corporates may have hedged some of their exposure). The
largest increases in USD debt relative to GDP include: Brazil (up 7.3 percentage
points of GDP), Turkey (up 6.2pp), Singapore (up 4.1pp) and Malaysia (2.9pp).
Looking at the rise in corporate debt relative to earnings using firm-level data for
large non-financial EM corporates confirms the substantial increase in total debt
burdens in the aftermath of the 2008 crisis.2 In particular, for the firms in our sample,
total debt has more than doubled close to $3 trillion while corporate earnings
(EBITDA) have only increased by around 68% during the same time period (Chart
40).
Across the large EM corporates, firms in Hong Kong, Brazil, and China have
recorded the largest increases in debt levels relative to earnings, while corporates
Brazil
Turkey
Singapore
Malaysia
EM
Mexico
S. Africa
Indonesia
Thailand
Russia
S. Korea
Hungary
India
Argentina
China
Czech Rep.
Poland
S. Arabia
Hong Kong
Chart 39
EM Non-Financial Corporate Debt and the U.S. Dollar
percentage point change in debt-to-GDP ratio reflecting
bilateral exchange rate movements since end -2014
8
7
6
5
4
3
2
1
0
-1
Source: BIS, IIF.

2
Based on an annual firm-level data on about 600 non-financial corporates listed in MSCI EM index from 18 emerging market countries.
Chart 36
Change in Non-financial Corporate Indebtedness
percentage point change in debt-to-GDP ratio since 2010
Hungary
Argentina
India
Saudi Arabia
Korea
Malaysia
Czech
South Africa
Russia
Mexico
Poland
Thailand
Indonesia
Brazil
Turkey
Singapore
China
Hong Kong
Source: BIS, IIF.
-15
Chart 37
Non-Financial Corporate Debt, Q1 2015
percent of GDP
Hong Kong
China
Singapore
South Korea
EM
Hungary
Malaysia
Czech
Turkey
Thailand
India
Brazil
Poland
Saudi Arabia
South Africa
Russia
Indonesia
Mexico
Argentina
15
30
45
60
75
Chart 38
Currency Breakdown of Non-Financial Corporate Debt
percent, Q1 2015 Other
EURO
USD
LC
Source: BIS, IIF.
LC
USD
EURO
Other
50
100
150
200
Chart 40
Total-Debt-to-EBITDA
ratio
Foreign Currency Debt-to-EBITDA
250
$ trillion
Local Currency Debt-to-EBITDA

EBITDA (Trailing 12-months, rhs)
Total Debt (rhs)
3.0
2.0
2.0
1.5
1.0
1.5
1.0
3.0
2.5
2.5
Hong Kong
Mexico
Turkey
Hungary
Singapore
Russia
Indonesia
South Africa
Argentina
Brazil
Poland
Czech
Malaysia
Saudi Arabia
Thailand
EM
India
South Korea
China
100
90
80
70
60
50
40
30
20
10
0
page 18
0.5
2008 2009 2010 2011 2012 2013 2014 2015
0.0
Source: BIS, IIF.
Chart 41
Non-Financial Corporates' Total Debt-to-EBITDA, by Country
ratio, total debt-to-EBITDA
6
Chart 42
Non-Financial Corporates' Total Debt-to-EBITDA, by Sector
ratio, total debt-to-EBITDA
7
Sept. 2015
2008
5
4
China
Brazil
Chile
Hong Kong
Philippines
Turkey
Colombia
Thailand
Malaysia
Korea
Czech Rep.
Mexico
India
S. Africa
Hungary
Poland
Indonesia
Russia

Sept. 2015
2008
page 19
in Hungary, Korea and Malaysia have seen a decline in their debt-to-EBITDA ratios
(Chart 41).
Firm-level data also reveal that the buildup in debt has been most pronounced in
the industrial, energy and materials sectors, while companies in the information
technology sector have been able to manage their debt relatively well compared
to other sectors (Chart 42).
The buildup in
debt has been
most pronounced
in the industrial,
energy and
materials sectors
Details on firm-level debt statistics indicate that Hong Kongs consumer staples
sector is the most indebted sector in our sample, with the debt-to-EBITDA ratio
increasing from 2.2 in 2008 to 11.8 in September 2015 (Tables 2 and 3). By region,
firms from Hong Kong, China and Chile dominate our Top 15 Debt Raisers list, while
non-financial corporates from materials and industrials sectors take over 50% of the
total slots in the Top 15 Debt Raisers list (Table 3).
Table 2
Top 15 Indebted Sectors, by Country
Table 2
Top 15 Total Debt Raisers
total debt-to-EBITDA ratio
change in total debt-to-EBITDA ratio, in levels
As of Sept. 2015
1
Hong Kong Consumer Staples
11.8
Change Since 2008

1
Hong Kong Consumer Staples
9.6
Colombia Materials
11.4
Hong Kong Materials
8.4
South Korea Industrials
11.3
Turkey Energy
8.3
Hong Kong Materials
9.7
South Korea Industrials
8.2
China Energy
9.7
Thailand Consumer Staples
6.2
Turkey Energy
8.7
Brazil Energy
4.6
Hong Kong Industrials
7.8
China Materials
4.2
China Energy
4.1
3.8
Thailand Consumer Staples
7.7
China Materials
6.8
China Industrials
10
China Industrials
6.7
10
Hong Kong Industrials
3.5
11
Hong Kong Information Technology
6.2
11
Chile Industrials
2.8
12
Chile Industrials
5.7
12
Chile Telecommunication Services
2.8
13
China Utilities
5.5
13
India Utilities
2.6
14
Chile Consumer Discretionary
5.5
14
Chile Materials
2.6
5.3
15
Brazil Materials
1.9
15
Brazil Energy
Source: Blloomberg, IIF.
page 20
IS THE CONCEPT OF EMERGING MARKETS STILL MEANINGFUL?

When the term was coined at the end of the 1980s, the group of countries referred to as
emerging markets shared a number of distinctive characteristics that made it appealing,
in particular for investors, to think of them as a single group that could be contrasted with
developed markets (DMs). Some of these characteristics included having relatively low per
capita income, strong growth prospects (and thus high expected returns), weaker
institutions and governmance, less developed financial markets, and greater propensity to
volatile performance.
Twenty-five years later, emerging markets is now used for a large array of countries that
are vastly different in their economic, governance and financial market structures. This has
led some observers to argue that these economies are too different to be usefully lumped
into one bucket. Others argue that the countries thought of as emerging markets still have
important characteristics in common, if only in contrast to the DM group.
One important commonality is that emerging markets have their own benchmarks for
asset allocation, so that many investors perceive and treat EMs as an asset class in making
investment decisions. Mutual funds and ETFs track the country weights of EM benchmark
indices to a significant, but varying, extent, which means that EM portfolio flows and asset
Table 4
Indicators Used for EM-DM ranking
higher value associated with mature economies, unless otherwise indicated
Unit
Source
Comments
Macroeconomic Indicators
GDP per Capita
USD
Haver, IMF
Growth
percent change
Headline Inflation
percent change, y/y
Non-FDI Inflows
percent of GDP
Haver, World
Bank
Haver, World
Bank
Haver, IIF, IMF
Exports: Share of Mining/Fuel
percent of total export WTO
Average of PPP-based and market-based

exchange rates
Higher growth associated with EMs, lower growth
with DMs
Higher inflation associated with EMs, lower inflation
with DMs
Sum of portfolio and other invesment inflow as a
share of GDP
Higher share associated with EMs, lower share with
DMs
Financial/Governance Indicators
DM MSCI Correlation
percent change
Fin. Market Development
aggregated score
Capital Account Openness
index
Worldwide Governance
Indicators
avg of 6 sub-indicators
Institutions
aggregated score
Ease of Doing Business
rank
Bloomberg
Correlation of the country's MSCI index with the

MSCI World
World Economic Measures efficiency, trustworthiness and confidence
Forum
of the financial system
Chinn-Ito Index Based on restrictions on cross-border financial
transactions reported in the IMF's AREAER database
World Bank
Six indicators: voice & accountability, political
stability & absence of violence, government
effectiveness, regulatory quality, rule of law, control
of corruption
World Economic Measures efficiency & transparency of public
Forum
administration, business ethics, corporate
governance
World Bank
Measures regulations directly affecting businesses
Source: IIF.
page 21
price movements are more correlated than they would otherwise be. This benchmark
effect is confirmed in a recent World Bank study.2
In order to address how meaningful the EM-DM divide is today, we compare the 30
countries that constitute the IIF EM-30 group and contrast them with a group of 15 mature
economies, comprised of the G7 and other major core and periphery countries in the Euro
Area. We rank the 45 countries along a number of macroeconomic, governance and
financial indicators that are often used to separate EM and mature economies (Table 4).
For each indicator, we then assign a percentile score from 0 to 100 to each country (e.g.,
the median country will receive a score of 50). We average the percentile scores among
all macroeconomic and among all financial/governance indicators to get two overall
rankings on the degree to which a country has the typical characteristics associated with
an emerging market.
We find that for most countries, the EM-DM divide holds reasonably well. Ranking all the
countries by their aggregate macroeconomic and governance/financial scores shows
Chart 43
2010-2014 Ranking by Financial and Governance Indicators
average of percentile
EM
DM
Euro Area Periphery Countries
VEN
ECU
UKR
NGA
ARG
LBN
EGY
PHL
RUS
MAR
IDN
CHN
IND
COL
GRC
BGR
ROU
TUR
BRA
THA
ITA
MEX
HUN
PER
SAU
CZE
KOR
POL
ZAF
ESP
MYS
PRT
UAE
JPN
CHL
IRL
EA
FRA
AUS
DEU
USA
CHE
GBR
CAN
SWE
100
90
80
70
60
50
40
30
20
10
0
Source: IIF.
Chart 44
2010-2014 Ranking by Macro Indicators
EM
DM
IND
IDN
NGA
ECU
EGY
PHL
RUS
ARG
SAU
PER
CHN
VEN
COL
MYS
BRA
THA
UKR
CHL
ZAF
ROU
MAR
MEX
TUR
KOR
BGR
HUN
ESP
LBN
AUS
POL
UAE
PRT
GBR
CAN
GRC
USA
DEU
ITA
CZE
FRA
EA
SWE
JPN
CHE
IRL
100
90
80
70
60
50
40
30
20
10
0
Source: IIF.
2 Raddatz, Claudio E., Sergio L. Schmukler, and Toms Williams. 2015. "International Asset Allocations and
Capital Flows: the Benchmark Effect." Policy Research Working Paper 6866. World Bank.
page 22
very limited overlap between the EM and DM groups (Charts 43 and 44). To the extent that
there is overlap, the DMs in question largely comprise the Euro Area periphery countries,
which arguably are in a category of their own. When considering both the
macroeconomic and the governance/financial ranking at the same time, there are only
three countries that rank above the 50th percentile in both categories: the Czech Republic,
Poland, and Hungary (Chart 45, top right quadrant), all members of the European Union.
Our analysis thus suggests that the EM-DM classification is not obsolete. However, our
results also show a significant degree of heterogeneity among emerging markets, as
illustrated by the wide dispersion of EM scores in the scatterplot.
In addition, it is important to note that while the term EM may provide some information
about a countrys stage of development, different groups of emerging markets may
respond very differently to different types of external shocks, depending on their economic
structures. For example, the recent decline in commodity prices, notably oil, will weigh on
commodity exporting countries while benefitting commodity importers. Similarly, emerging
markets with current account deficits would likely suffer more from a Fed tightening shock
than surplus countries.
Hence, while there are good reasons to think of emerging markets as an asset class, it
remains important for investors to understand country characteristics and country-specific
vulnerabilities and to make decisions on investment allocation accordingly. The detailed
country ranking is provided on page 37.
Chart 45
2010-2014 Financial & Governance Indicators vs. Macro Indicators
100
Financial & Governance
EM
DM
CAN
80
AUS
20
40
PER
COL
CHN BRA
RUS
EGY
NGA
Source: IIF.
ECU
PHL
CHE
DEU
FRA
MEX
ZAF
40
ESP
PRT
THA
60
80
ITA
UAE
GRC
20
VEN
IRL
Macro
MAR
ARG
JPN
CZE
HUN POL
ROU
BGR
UKR TUR
IDN
IND
60
KOR
SAU
SWE
EA
CHL
MYS
USA
GBR
LBN
100
page 23
EMERGING ASIA: HIT BY CHINA CONCERNS AND GLOBAL WOES

We project non-resident private capital flows to Emerging Asia to plunge in 2015
to lows unseen since the global financial crisis, before a tepid revival in 2016
Bejoy Das Gupta

Chief Economist
Asia/Pacific
1-202-857-3649
bdasgupta@iif.com
(Chart 46). Much of the drop reflects reduced offshore borrowing by Chinese
corporates responding to shifting perceptions about RMB management. In Asia,
heightened risk aversion towards EMs is amplified by China-related uncertainty
triggered by the slowdown in China along with its surprise depreciation and stock
market meltdown, as well as large foreign holdings and relatively liquid markets.
The result has been a sharp selloff of domestic stocks and bonds from mid-year.
Non-resident private
Moreover, in several Asian EMs, delayed public investment programs and
capital flows to
structural reforms have had a negative impact, as have fractious politics and
Emerging Asia to
weakness in commodity prices.
plunge in 2015 to
lows unseen since
While the adverse factors are expected to dissipate somewhat over the next year,
the global financial
continuing concerns about Chinas growth trajectory and policy responses pose a
crisis, before a tepid
key downside risk and market volatility is likely to continue to dampen inflows in
revival in 2016
2016, although not to the same extent as this year. Parallels have been drawn with
the Asian crisis, although fundamentals have improved, and moderate public
debt, large reserves, exchange rate flexibility and stronger banks in most countries
should protect against another full-blown crisis.
The slump in private capital inflows is most dramatic for China (Chart 47). Slowing
growth due to excess industrial capacity, correction in the property sector and
export weakness, together with monetary easing and the stock market bust have
discouraged inflows. The biggest shift is that there has been a decline in nonresident inflows and rising resident outflows related to corporations seeking to
Slump most dramatic

for China
reduce their open FX positions, after building up dollar debt, on expectations of

continuing RMB depreciation. Heavy outflows and volatile market conditions
following the August 11 move to provide more of a role for market forces in FX
fixing and trading prompted heavy intervention to support the RMB.
Chart 46
EM Asia: Non-Resident Private Capital Inflows
$ billion
percent of GDP
Nonbank Debt
Bank Lending
7
800
Portfolio Equity
FDI
700
6
IIF Forecast
600
% of GDP
5
500
400
300
200
100
-100
-200
0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: IIF.
Chart 47
China: Capital Flows and Current Account Balance
$ billion
Other Inflows
Other Outflows
Portfolio Debt Inflows
Portfolio Debt Outflows
Portfolio Equity Inflows
Portfolio Equity Outflows
FDI
ODI
200
150
IIF Forecast
100
50
0
-50
-100
-150
-200
-250
13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3
Source: SAFE, IIF.
Overall, capital outflows from China should stabilize in the fourth quarter of 2015
and into 2016 and the pace of intervention should moderate, although an
intensification of growth concerns could add to pressures if markets start to
anticipate a renewed policy shift to let the RMB depreciate further. We also
expect policymakers to be more cautious on capital account liberalization out of
concern that it contributes to further outflows and adds to RMB weakness.
Elsewhere in the region, countries with large foreign portfolio holdings have been
adversely affected by shifts in investor sentiment (Charts 48 and 49). Malaysia has
been hard hit by nervousness triggered by the plunge in energy prices and
heightened political concerns, contributing to sizeable withdrawal of non-
page 24
Chart 48
EM Asia: External Bond
Issuance
$ billion
30
25
20
15
10
5
0
2013
2015 *
2014
Source: ThomsonOne. *15Q3

through Sep 17.
resident portfolio investments. We expect some moderation in non-resident

portfolio outflows in 2016, while the stepped-up use of reserves and governmentlinked entities reducing their investments abroad should support the external
position and contain pressure on the ringgit. Non-resident capital inflows to
Indonesia have been impacted by weak energy and coal prices, slowing China
and EM risk aversion. Nevertheless, resilient FDI and large issuance of sovereign
external bonds are providing support along with moderately tight monetary
policy, fiscal discipline and efforts to advance reforms (Chart 50).
While Thailand has not been immune to the portfolio selloff and the government
has liberalized resident capital outflows, sizeable inward FDI and a large current
account surplus have supported the external position. Meanwhile, the fall in
capital inflows has been less prominent in Korea and the Philippines. For Korea,
inward FDI, participation of long-term foreign institutional investors in debt
markets and a diversified equity investor base along with the large current
Chart 49
Portfolio Flows to EM Asia
$ billion
Total
20
10
0
-10
-20
-30
2013
Equity
2014
Debt
2015*
Source: National Sources, IIF.

Includes India, Indonesia,
Malaysia, Philippines, South
Korea, and Thailand. *Through
Aug. 2015
account surplus are bolstering the balance of payments. In the Philippines, a

relatively insulated capital account, both on the portfolio equity and debt sides,
has help shield the external position against EM stress, combined with large
workers remittances underpinning the current account surplus, positive growth
outlook and moderate FDI.
In India, non-resident capital inflows have been dampened somewhat by recent
foreign portfolio equity and debt net sales along with a slippage in bank lending
because of slow investment recovery and falling imports, but inward FDI is on an
upward trajectory, accompanied by rising Non-Resident Indian (NRI) deposits in
the banking system and sizeable external bond issuance. The failure so far to
push through legislation for the Goods and Services Tax (GST) and land reforms
due to opposition in the upper house of parliament has taken off some of the
shine from the India story, but other reforms to tackle supply-side impediments
are advancing, the legacy tax dispute for foreign portfolio investors has been
recently resolved and lower inflation is allowing room for monetary easing to
support growth.
Chart 50
Foreign Holdings of
Domestic Securities
percent of total
ID
MY
TH
KO
IN
LCY Gov
Bonds
Equity
CH*
0 10 20 30 40 50
Source: National Sources, ADB,

CEIC, IIF. *Includes gov and
corp bonds.
page 25
EMERGING EUROPE: RISKS REMAIN TILTED TO THE DOWNSIDE

Emerging Europe has experienced substantial net capital outflows since the start of
2014, both through non-resident capital withdrawals and heavy resident outflows. Net
outflows from the region continued to be driven primarily by Russia, although the
anticipation of Fed rate hikes as well as political uncertainty in some countries in the
Ugras Ulku
Senior Economist
Emerging Europe
1-202-857-3617
uulku@iif.com
region (such as Turkey) also depressed non-resident private capital outflows. Excluding
Russia, net inflows of non-resident private capital declined from $20 billion per quarter
on average during the second half of 2014 to $9 billion in the second quarter of 2015
(Chart 51). Resident capital outflows slowed to $7 billion in the second quarter from
$23 billion in the first, thanks to a marked slowdown in outflows from Russia, the Czech
Republic and Turkey (Chart 52).
With global risk aversion amid concerns about a growth slowdown in China, as well as
expectations of Fed liftoff in late 2015, market sentiment towards emerging markets
turned more negative in the second quarter, especially for commodity exporters and
Net outflows from

the region
continued to be
driven primarily
by Russia
those with large external financing needs. In Emerging Europe, major commodity
exporters of Russia and Ukraine suffered the most. CEE and Turkey, by contrast,
benefited somewhat from a pick-up in economic activity in the Euro Area during the
first half of 2015. Indeed, Turkey received the lions share of net inflows of foreign
private capital in the second quarter of 2015, as a sharp shift to direct foreign
borrowing by Turkish companies offset the decline in net foreign borrowing by Turkish
banks. Even so, political concerns in Turkey have led to broader policy uncertainty.
With credit demand weak, CEE banks continued to make net foreign debt
repayments in the second quarter.
Ukraine returned to the international bond markets in the second quarter with a
$1 billion government bond with a U.S. sovereign guarantee and plans to issue another
$1 billion before year-end. Ukrainian state-owned Oschadbank issued a new
$1.2 billion bond in the third quarter to swap the bank's two bonds maturing in 2016
and 2018 as part of a debt restructuring deal agreed in June with private creditors
under the framework of the IMF-supported program. However, overall international
bond issuance declined from $19 billion in the first quarter to $5 billion in the third
Chart 51
Emerging Europe: Non-resident Private Capital Inflows, Net
$billion
CEE
Russia
50
Turkey
Ukraine
20
Turkey
Ukraine
10
Total
30
Chart 52
Emerging Europe: Resident Private Capital Outflows, Net
$ billion
30
CEE
Russia
0
-10
-20
10
-30
-40
-10
-50
-60
-30
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
Source: IIF.
-70
14Q1
Source: IIF.
14Q2
14Q3
14Q4
15Q1
15Q2
page 26
quarter, driven mainly by lower issuance by Russia and Turkey (Chart 53).
Looking ahead, we project a modest recovery of inflows, but the outlook will crucially
The near-term
outlook for the
region will
depend on the
timing and path
of Fed rate hikes
as well as
political
uncertainty in
Turkey
depend on the timing and path of Fed rate hikes as well as political uncertainty in
Turkey. Even though the ECBs QE program should ensure abundant liquidity in
European markets, the anticipated Fed rate hikes as well as China-related uncertainty
should keep global risk appetite weak. U.S. and EU sanctions are likely to remain in
place, leading to further, but smaller, net outflows of non-resident private capital from
Russia during the remainder of 2015 and into 2016. Net inflows of non-resident private
capital elsewhere in the region should remain broadly unchanged during the rest of
the year from their second-quarter level before picking up slightly next year. As a
result, for the region as a whole (including Russia), non-resident private capital will
likely shift to a modest inflow of $43 billion in 2016 from a projected outflow of
$20 billion this year (Chart 54). Part of the shift would reflect moderate portfolio equity
inflows in 2016 and domestic banks shifting back to net foreign borrowing in 2016. FDI
inflows should remain subdued in 2016, as output growth looks likely to remain soft
across the region.
Risks remain tilted to the downside, mainly related to the political uncertainty in Turkey
and the potential impact of divergent G3 monetary policy stances. Should Fed
tightening trigger a sharp rise in risk aversion, Turkey would be particularly vulnerable
given its sizable current account deficit and reliance on short-term foreign bank
borrowing to fund its deficit. Such risks could be reduced if the November 1 elections
yield an effective government, but higher interest rates and continued political
instability could imply tighter external financing conditions for Turkish banks, and
corporate balance sheets would be further damaged by continuing depreciation of
the Turkish lira. Despite a large current account surplus and ample foreign exchange
reserves, Hungary also looks vulnerable to the Feds rate hikes, with U.S. investors
holding a large share of Hungarys government debt. Additionally, an escalation in
the Ukraine conflict would likely result in tighter sanctions, which would lead to a
renewed intensification of capital outflows from Russia.
Chart 53
Emerging Europe: Eurobond Issuance, Gross
$ billion
30
CEE
Russia
Turkey
Ukraine
Chart 54
Emerging Europe: Non-resident Private Capital Inflows
Nonbanks, Net
$ billion
Direct Investment, Net
300
Commercial Banks, Net
250
Portfolio Investment, Net
200
20
Total
150
IIF Forecast
100
50
10
0
-50
0
14Q1
Source: IIF.
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
-100
2011
Source: IIF.
2012
2013
2014
2015
2016
page 27
LATIN AMERICA: UNDER PRESSURE
Ramn Aracena
Chief Economist
Latin America
1-202-857-3630
raracena@iif.com
Continued commodity price weakening, heightened global risk aversion, and

domestic policy shortcomings have put sustained downward pressure on local
currencies, weighed on real GDP growth and held down private capital inflows
this year. Conditions have deteriorated since our last capital flows report in May,
Julia Smearman
Research Analyst
Latin America
1-202-682-7451
jsmearman@iif.com
leading to substantial downward revisions in both our regional growth outlook as

well as capital flow projections (Chart 55). We project Latin Americas output will
contract almost 1.0% in 2015 and non-resident capital inflows will fall by $42 billion
vis--vis 2014. Brazils worsening performance has been a major drag on the
region. Flows are expected to pick up somewhat next year, but remain subdued,
consistent with slower growth momentum and the impact of Fed interest rate
liftoff.
In Brazil, the political crisis has, thus far, precluded the implementation of an
effective confidence-enhancing fiscal adjustment, triggering the loss of its
We project Latin
Americas output
will contract
almost 1.0% and
private capital
inflows will fall
13% this year vis-vis 2014
investment grade credit rating by Standard and Poors in early September.

Deteriorating domestic conditions have been reflected in relentless market
pressure and capital outflows. The real has weakened close to 50% to 4.2 reais/$
since the beginning of the year (its weakest level in over two decades), prompting
the central bank to step up intervention in the spot as well as the FX derivatives
market (Chart 56). EMBIG spreads have widened over 225 basis points to some
500 bps. Overall portfolio flows (equity and debt) turned negative in July and
August (Chart 57). We expect this trend to continue in the coming months and
possibly intensify as the economy contracts further and expectations of real
depreciation persist. With little political leverage and a hostile Congress, we are
skeptical that the government will be able to deliver on its newly proposed fiscal
package aimed at restoring confidence. Thus, we expect market stress and
subpar growth to continue throughout 2016. Inflows are projected to decline
again in 2016 compared to 2015 and the local currency to depreciate further to
around 4.5 reais/$.
Chart 55
Latin America: Private Capital Inflows and GDP Growth
$ billion
percent y/y
Downward
Private Inflows
350
Forecast Revisions* 4
IIF Forecast
275
3
200
125
50
-25
GDP Growth
-100
-175
2012
2013
Source: IIF; *Since May 2015 CFR.
2014
Previous Growth
Forecasts*
2015
2016
-1
-2
Chart 56
Latin America: Local Currency vs. U.S. Dollar
index (2001=100), inverted
60
Chile
Colombia
80
100
120
140
Mexico
160
180
2001
Brazil
2003
2005
Source: Bloomberg.
2007
2009
2011
2013
2015
page 28
Chart 58
Mexico: Foreign Holdings of Local Currency Debt
percent of total
Chart 57
Brazil: Portfolio Inflows
$ billion
15
Debt
Equity
10
Cetes
70
60
50
40
30
Total
Bonos
20
-5
-10
10
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
Source: Central Bank of Brazil.
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Central Bank of Mexico.
Despite global jitters and peso depreciation, portfolio inflows to Mexico have
remained relatively stable, albeit at a lower level than last year. The stock of
foreign holdings of local public debt has held around 36% of total with a shift in
portfolio composition away from short-term instruments (Chart 58). We have
moderated our expectations for a pick up in private capital inflows next year due
to a downward growth revision and the impact of low oil prices on foreign direct
investment in the newly opened energy sector. Below-trend growth and weak
commodity prices have also taken a toll on our outlook for capital flows to the
other Pacific Alliance members (Chart 59).
Chart 59
Stock Market Indices
index (end-2014=100)
110
100
80
remains to be resolved. The central bank has relied heavily on a currency swap
70
local law dollar issuance, international reserves will likely be reduced by $6 billion
to service a maturing bond in October, declining to $15 billion (excluding the
Colombia
90
Private inflows to Argentina have remained minimal as the holdout creditors saga
from China to support an artificially strong peso. Given that litigation has halted
Chile
60
Dec 14
Peru
Jun 15
Source: Bloomberg.
China currency swap) by this December, the lowest level in over a decade. We
expect the next administration, due to take office in December, will give priority to
resolving the holdout creditors issue to regain access to global capital markets.
However, we do not anticipate a quick return to robust private capital inflows
unless a comprehensive and front-loaded policy shift to restore macroeconomic
balance is also implemented.
Unwilling to adjust policies ahead of legislative elections in December, Venezuela
has continued to tap unconventional sources and draw down external assets to
finance its foreign exchange needs. We estimate the government has managed
to raise about $20 billion in financing so far this year by borrowing heavily from
China, withdrawing its Special Drawing Rights from the IMF, and issuing debt
through Citgo. Private capital inflows have been virtually nonexistent. With a
looming financing gap projected for next year and uncertain political dynamics,
a credit event remains a clear risk.
We do not
anticipate a
quick return to
robust private
capital inflows
unless a
comprehensive
and front-loaded
policy shift is also
implemented
page 29
MENA: END OF AN ERA FOR LARGE CAPITAL OUTFLOWS

Until recently, MENA oil-exporting countries (Saudi Arabia, the UAE, Qatar, Kuwait,
Oman, Bahrain, Algeria, Iran, Iraq and Libya) were major exporters of capital
(Chart 60), recycling their combined current account surplus, which peaked at
Garbis Iradian
Chief Economist
Middle East and North Africa
1-202-857-3304
giradian@iif.com
$467 billion in 2012. The drop in oil prices since mid-2014, however, is shifting the
aggregate current account to a projected deficit of $82 billion in 2015 from a
surplus of $233 billion in 2014. Accordingly, we project a dramatic shift from resident capital outflows of $212 billion in 2014 to a small net inflow of $15 billion in
2015. Resident capital outflows will increase slightly in 2016, assuming oil prices recover to $63/bbl.
In consequence, net foreign assets of MENA exporting countries are expected to
decline by about $165 billion to $2.5 trillion in 2015, about half of which is
managed by SWFs (Chart 61). The other 45% is in official reserves, mostly of Saudi
Arabia and Algeria. The projected decline in official reserves will lead to lower
deposits with foreign banks and debt securities, while the smaller accumulations in
SWFs will be reflected in less FDI and portfolio investment abroad.
Chart 61
MENA Oil Exporters:
Net Foreign Assets
IIF
$ billion
Forecast
2700
2400
2100
1800
1500
1200
900
600
2006
2011
2017
Source: IIF.
Capital inflows to the five MENA countries in our universe (the UAE, Saudi Arabia,
versely affect FDI. In Egypt, the previously expected strong pick-up in FDI has not
Chart 62
MENA: Private Inflows
$ billion
Other
Portfolio
75
FDI
60
yet materialized due partly to the slow pace of structural reforms. In Morocco, the
45
capital and financial accounts are expected to improve further, particularly FDI,
30
Egypt, Morocco, and Lebanon) are projected to decrease in 2015 as FDI and
bank inflows decrease in Saudi Arabia and the UAE (Chart 62). In the UAE, the
strong U.S. dollar has made the real estate market more expensive and may ad-
as political stability and improvement in the business environment make Morocco

a more attractive destination. In Lebanon, the modest decline in FDI is being offset
15
by the continued strong growth in nonresident deposits in domestic banks (Chart
63).
Source: IIF.
-200
-300
-400
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: IIF.
2016
UAE
Saudi A.
Egypt
Source: IIF.
2014
2015
2016
0
-100
2014
2015
2016
100
2014
2015
2016
200
2014
2015
2016
300
2015
Chart 63
Private Inflows to Selected MENA Economies
$ billion
33
30
Private Creditors
27
24
21
Direct Investment
18
15
12
9
6
3
0
2014
2015
2016
Chart 60
MENA Oil Exporters: Capital Outflows and Current Account
$ billion
500
IIF
Current Account
Forecast
400
2014
Morocco Lebanon
page 30
SUB SAHARAN AFRICA: BUFFETED BY GLOBAL HEADWINDS
David Hedley
Chief Economist
Sub-Saharan Africa
1-202-857-3605
dhedley@iif.com
Lower oil and metal prices, concerns over China and anxiety over Fed liftoff have
adversely impacted capital flows to Sub Saharan Africa this year. This has resulted
in accelerated currency depreciation in a number of countries, requiring policy
tightening to control inflation. Growth has slowed, which in turn has made
countries less attractive investment destinations. Eurobond yields have increased
and issues have slowed. Nigeria has been out of the market, reflecting the
extended political transition, and Kenya is not issuing this year after its successful
debut in 2014. By contrast, Zambia and Ghana, have or are about to come to
market to help finance large budget deficits and to reduce heavy pressure on
their balance of payments.
The drop in oil prices and political uncertainty in Nigeria have had a major impact
on capital flows (Chart 64). Despite two de facto devaluations, the naira has
remained under pressure and the central bank has introduced measures to ration
The drop in oil

prices and
political
uncertainty have
had a major
impact on capital
flows to Nigeria
the supply of foreign currency to preserve its international reserves. Under these
circumstances, and with Nigeria being removed from the JP Morgan Government
Bond index due to reduced FX liquidity, we expect portfolio flows to remain
sidelined. While there is scope for external borrowing, given Nigerias relatively low
debt ratios, the new government may be reluctant to tap international markets in
current circumstances. The extended political transition has added to uncertainty
and is taking a toll on confidence, causing FDI decisions to be postponed.
Portfolio flows into South Africa, especially equity (Chart 65), have fared a little
better this year, despite a deterioration in domestic economic conditions and
increased global financial market volatility. Inflation fell earlier in the year, but is
now on an upward trajectory again and will likely breach the top of its 3-6%
target range by year-end. This, together with steady currency depreciation,
prompted the Reserve Bank to tighten monetary policy in July. Despite bond
yields edging higher, foreign appetite for fixed income securities has remained
weak, dampening total portfolio flows. We expect this to remain the case while
uncertainty persists over the timing of Fed liftoff.
Chart 65
South Africa: Nonresidents' Purchases/Sales of Equities
$ billion, cumulative YTD
Chart 64
Nigeria: Net Portfolio Investment
$ billion
6
Equity
Debt
5
4
3
2014
3
2
1
0
-1
-1
-2
-3
Jun 10
2015
-2
Sep 11
Dec 12
Mar 14
Jun 15
Source: Central Bank of Nigeria.

2013
2012
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: South African Reserve Bank
page 31
Table 5
Emerging Asia: Capital Flows
$ billion
Private Inflows
Equity Investment
Direct Investment
Private Creditors
Commercial Banks
Nonbanks
Official Inflows
Bilateral Creditors
Private Outflows
2013
2014
2015 Est. 2016 Proj.
676
619
191
350
668
613
185
344
396
349
442
372
378
364
375
313
47
70
14
62
272
127
171
73
-193
-165
-31
-38
145
99
-29
8
3
6
4
6
4
7
3
-961
-801
-543
-719
-506
-609
-746
-741
-211
-219
-248
-274
-295
-390
-498
-467
-455
-192
203
23
-285
-182
-352
-368
170
10
-555
-391
Memo:
64
-83
221
265
352
368
page 32
Table 6
Emerging Europe: Capital Flows
$ billion
2013
Private Inflows
Equity Investment
Direct Investment
Private Creditors
Commercial Banks
Nonbanks
Official Inflows
Bilateral Creditors
Private Outflows
2014
2015 Est. 2016 Proj.
214
38
-4
51
218
31
-20
43
64
66
52
59
17
33
44
42
-2
-7
-16
154
20
-22
32
-37
-14
-1
10
134
-54
-23
-11
-4
-12
7
3
17
14
8
10
-2
-178
-55
-64
-100
-179
-163
-50
-87
-101
-57
-50
-48
-78
-106
-39
107
-14
-13
36
-18
-67
-50
35
-125
-54
-37
Memo:
-10
-3
-27
20
67
50
page 33
Table 7
Latin America: Capital Flows
$ billion
Private Inflows
Equity Investment
Direct Investment
Private Creditors
Commercial Banks
Nonbanks
Official Inflows
Bilateral Creditors
Private Outflows
2013
2014
2015 Est. 2016 Proj.
323
316
274
282
304
291
239
257
145
125
138
116
120
103
128
110
20
22
17
18
159
23
153
32
120
21
129
27
135
122
98
102
19
3
25
5
34
7
25
8
16
20
27
17
-151
-142
-113
-148
-154
-119
-127
-150
-63
-63
-64
-62
-92
-56
-63
-89
-23
14
172
174
161
135
169
197
147
132
Memo:
-30
-11
-143
-163
-161
-135
page 34
Table 8
Africa/Middle East: Capital Flows
$ billion
Private Inflows
Equity Investment
Direct Investment
Private Creditors
Commercial Banks
Nonbanks
Official Inflows
Bilateral Creditors
Private Outflows
2013
2014
2015 Est. 2016 Proj.
92
102
87
93
83
97
79
84
58
38
51
39
46
36
52
37
20
12
10
15
25
2
46
28
34
23
32
17
22
18
11
15
10
3
5
1
8
3
9
3
-238
-165
-28
-47
-147
-151
-165
-103
-46
-63
-46
-50
-101
-88
-119
-53
-91
-14
138
56
-146
-64
59
46
-55
-50
-78
-10
Memo:
-34
-40
179
104
-59
-46

Table 9
0-20%
20-40%
40-60%
60-80%
2010-2014 Percentile Rank: Macro Indicators
RGDP per
RGDP
Headline
Non-FDI
RGDP per
capita
Growth Rate
Inflation
Inflows
capita
Growth Rate
% change
% change % change, y/y % of GDP
USD
Average Category Unit
Year(s)
2010-2014 av erage
Source
Hav er, IMF
Hav er
Hav er
IIF, Hav er
IIF, Hav er
Other Metadata PPP market
page 35
80-100%
Exports:
Share of
Mining/Fuel
% of export
WTO
32.0% EM
Argentina
47.7%
45.4%
18.2%
27.3%
2.3%
27.2%
61.4%
36.6% EM
Brazil
29.5%
29.5%
38.7%
41.0%
18.2%
59.0%
36.4%
46.4% EM
Bulgaria
31.8%
27.2%
52.3%
79.6%
66.0%
36.3%
34.1%
42.1% EM
Chile
45.4%
52.2%
16.0%
25.0%
36.4%
90.9%
13.7%
35.0% EM
Colombia
22.7%
25.0%
20.5%
22.8%
52.3%
65.9%
11.4%
21.9% EM
Ecuador
13.6%
20.4%
22.8%
20.5%
31.9%
22.7%
16.0%
15.2% EM
Indonesia
11.3%
9.0%
6.9%
6.9%
20.5%
18.1%
20.5%
58.9% EM
Lebanon
36.3%
43.1%
54.6%
45.5%
38.7%
95.4%
70.5%
32.5% EM
Peru
18.1%
22.7%
4.6%
11.4%
47.8%
68.1%
18.2%
43.9% EM
South Africa
25.0%
34.0%
77.3%
56.9%
22.8%
72.7%
27.3%
40.5% EM
Ukraine
9.0%
11.3%
47.8%
91.0%
16.0%
56.8%
50.0%
44.3% EM
Morocco
6.8%
13.6%
43.2%
34.1%
91.0%
34.0%
47.8%
16.8% EM
Nigeria
2.2%
0.0%
34.1%
13.7%
4.6%
52.2%
2.3%
29.8% EM
Russia
56.8%
38.6%
36.4%
47.8%
13.7%
38.6%
6.9%
32.0% EM
Saudi Arabia
93.1%
61.3%
25.0%
18.2%
27.3%
29.5%
4.6%
59.8% EM
UAE
100.0%
70.4%
88.7%
29.6%
88.7%
40.9%
25.0%
33.6% EM
Venezuela
40.9%
36.3%
91.0%
81.9%
0.0%
43.1%
0.0%
23.0% EM
Egypt
15.9%
6.8%
70.5%
50.0%
6.9%
6.8%
29.6%
14.3% EM
India
0.0%
2.2%
2.3%
2.3%
9.1%
20.4%
38.7%
45.2% EM
Mexico
34.0%
47.7%
45.5%
38.7%
29.6%
70.4%
43.2%
59.5% EM
Poland
52.2%
54.5%
31.9%
43.2%
61.4%
77.2%
68.2%
44.1% EM
Romania
38.6%
31.8%
50.0%
75.0%
25.0%
31.8%
66.0%
45.3% EM
Turkey
43.1%
50.0%
11.4%
16.0%
11.4%
81.8%
72.8%
33.4% EM
China
20.4%
18.1%
0.0%
0.0%
43.2%
9.0%
95.5%
74.1% EM
Czech Republic 63.6%
59.0%
81.9%
86.4%
77.3%
63.6%
84.1%
51.6% EM
Hungary
54.5%
56.8%
59.1%
77.3%
41.0%
2.2%
91.0%
45.9% EM
Korea
65.9%
68.1%
29.6%
31.9%
59.1%
13.6%
59.1%
36.0% EM
Malaysia
50.0%
40.9%
13.7%
9.1%
56.9%
25.0%
41.0%
26.4% EM
Philippines
4.5%
4.5%
9.1%
4.6%
34.1%
11.3%
75.0%
39.3% EM
Thailand
27.2%
15.9%
27.3%
36.4%
50.0%
15.9%
77.3%
59.3% DM
Australia
86.3%
81.8%
72.8%
52.3%
54.6%
86.3%
9.1%
66.2% DM
Canada
81.8%
84.0%
63.7%
54.6%
68.2%
88.6%
31.9%
77.9% DM
Eurozone
77.2%
86.3%
86.4%
88.7%
75.0%
45.4%
100.0%
77.1% DM
France
79.5%
77.2%
84.1%
84.1%
86.4%
54.5%
81.9%
70.9% DM
Germany
84.0%
88.6%
41.0%
63.7%
81.9%
47.7%
86.4%
66.4% DM
Greece
61.3%
65.9%
100.0%
100.0%
84.1%
61.3%
22.8%
91.2% DM
Ireland
90.9%
97.7%
68.2%
72.8%
95.5%
97.7%
97.8%
73.9% DM
Italy
70.4%
75.0%
97.8%
95.5%
70.5%
50.0%
79.6%
86.2% DM
Japan
72.7%
79.5%
56.9%
70.5%
97.8%
100.0%
93.2%
61.2% DM
Portugal
59.0%
63.6%
95.5%
97.8%
79.6%
4.5%
63.7%
58.2% DM
Spain
68.1%
72.7%
93.2%
93.2%
72.8%
0.0%
54.6%
78.2% DM
Sweden
88.6%
95.4%
61.4%
59.1%
93.2%
93.1%
52.3%
88.9% DM
Switzerland
97.7%
100.0%
79.6%
66.0%
100.0%
84.0%
88.7%
65.0% DM
United Kingdom 75.0%
90.9%
75.0%
68.2%
45.5%
79.5%
45.5%
70.7% DM
United States
93.1%
66.0%
61.4%
63.7%
75.0%
56.9%
95.4%

Table 10
0-20%
20-40%
40-60%
2010-2014 Percentile Rank: Financial & Governance Indicators
Capital
Worldwide
DM MSCI
Account
Governance Institutions
Correlation
Openness
Indicators
% change
z-score
Average Category Unit
Year(s)
2010-2014 av erage
Source
Bloomberg
Chinn-Ito
Hav er, WB
WEF
page 36
60-80%
Financial
Market Devt
WEF
80-100%
Ease of
Doing
Business
Rank
Hav er, WB
18.0% EM
Other Metadata MSCI, S&P

Argentina
53.4%
4.5%
av erage
27.2%
4.5%
4.5%
13.7%
41.9% EM
Brazil
74.4%
27.2%
43.1%
36.3%
59.0%
11.4%
36.4% EM
Bulgaria
16.2%
59.0%
47.7%
15.9%
31.8%
47.8%
66.9% EM
Chile
62.7%
54.5%
77.2%
77.2%
70.4%
59.1%
35.0% EM
Colombia
51.1%
25.0%
22.7%
18.1%
40.9%
52.3%
9.5% EM
Ecuador
0.0%
40.9%
4.5%
2.2%
0.0%
9.1%
32.2% EM
Indonesia
23.2%
34.0%
20.4%
52.2%
45.4%
18.2%
20.8% EM
Lebanon
6.9%
45.4%
11.3%
9.0%
29.5%
22.8%
50.6% EM
Peru
60.4%
59.0%
36.3%
20.4%
63.6%
63.7%
55.9% EM
South Africa
55.8%
6.8%
50.0%
65.9%
100.0%
56.9%
10.7% EM
Ukraine
25.5%
0.0%
13.6%
6.8%
11.3%
6.9%
28.4% EM
Morocco
4.6%
6.8%
31.8%
54.5%
43.1%
29.6%
13.6% EM
Nigeria
9.3%
22.7%
2.2%
11.3%
34.0%
2.3%
26.7% EM
Russia
69.7%
36.3%
6.8%
13.6%
9.0%
25.0%
50.6% EM
Saudi Arabia
1.2%
45.4%
25.0%
81.8%
81.8%
68.2%
61.8% EM
UAE
13.9%
59.0%
59.0%
93.1%
75.0%
70.5%
0.8% EM
Venezuela
2.3%
0.0%
0.0%
0.0%
2.2%
0.0%
21.6% EM
Egypt
11.6%
38.6%
9.0%
34.0%
15.9%
20.5%
35.0% EM
India
41.8%
6.8%
29.5%
50.0%
77.2%
4.6%
46.1% EM
Mexico
81.3%
45.4%
38.6%
22.7%
38.6%
50.0%
55.2% EM
Poland
67.4%
29.5%
65.9%
56.8%
65.9%
45.5%
39.9% EM
Romania
44.1%
59.0%
45.4%
25.0%
27.2%
38.7%
41.8% EM
Turkey
48.8%
29.5%
40.9%
45.4%
50.0%
36.4%
33.5% EM
China
37.2%
6.8%
15.9%
61.3%
52.2%
27.3%
50.9% EM
Czech Republic
39.5%
59.0%
70.4%
40.9%
54.5%
41.0%
49.4% EM
Hungary
58.1%
59.0%
61.3%
38.6%
36.3%
43.2%
51.2% EM
Korea
34.8%
43.1%
63.6%
47.7%
22.7%
95.5%
58.0% EM
Malaysia
20.9%
18.1%
52.2%
75.0%
97.7%
84.1%
25.0% EM
Philippines
18.6%
20.4%
18.1%
27.2%
47.7%
18.2%
42.5% EM
Thailand
30.2%
6.8%
34.0%
43.1%
61.3%
79.6%
77.8% DM
Australia
46.5%
52.2%
93.1%
86.3%
95.4%
93.2%
85.5% DM
Canada
86.0%
59.0%
95.4%
95.4%
88.6%
88.7%
69.3% DM
Eurozone
97.6%
56.8%
75.0%
68.1%
56.8%
61.4%
75.3% DM
France
95.3%
59.0%
79.5%
72.7%
79.5%
66.0%
80.3% DM
Germany
93.0%
59.0%
90.9%
88.6%
68.1%
81.9%
36.1% DM
Greece
32.5%
59.0%
54.5%
31.8%
6.8%
31.9%
68.4% DM
Ireland
72.0%
59.0%
88.6%
84.0%
18.1%
88.7%
45.3% DM
Italy
79.0%
59.0%
56.8%
29.5%
13.6%
34.1%
66.7% DM
Japan
27.9%
59.0%
84.0%
79.5%
72.7%
77.3%
58.9% DM
Portugal
65.1%
59.0%
72.7%
63.6%
20.4%
72.8%
57.1% DM
Spain
76.7%
59.0%
68.1%
59.0%
25.0%
54.6%
88.2% DM
Sweden
88.3%
59.0%
100.0%
100.0%
90.9%
91.0%
84.4% DM
Switzerland
83.7%
59.0%
97.7%
97.7%
93.1%
75.0%
84.8% DM
United Kingdom
90.6%
59.0%
86.3%
90.9%
84.0%
97.8%
82.9% DM
United States
100.0%
59.0%
81.8%
70.4%
86.3%
100.0%
page 37
ANNEX 1: IIF CAPITAL FLOWS DATA A LAYMANS GUIDE

Capital flows arise through the transfer of ownership of assets from one country to
another. When analyzing capital flows, we care about who buys an asset and who
sells it. If a foreign investor buys an emerging market asset, we typically refer to this as
a non-resident capital flow (or inflow) in our terminology. We report capital flows on a
net basis. For example, if foreign investors buy $10 billion of assets in a particular
country and sell $2 billion of that countrys assets during the same period, we show
this as a (net) capital inflow of $8 billion. Note that non-resident capital flows can be
negative, namely if foreign investors sell more assets of a country than they buy in a
given period. Our non-resident private capital flows to emerging markets measure is
the sum of all net purchases of EM assets by private foreign investors.
Correspondingly, if an investor from an emerging market country buys a foreign asset,
we call this a resident capital flow (or outflow). Non-resident capital flows can also be
positive or negative. Following standard balance of payments conventions, we show
a net increase in the assets of EM residents with a negative sign.
For further details regarding terminology, concepts and compilation of our data,
please consult our User Guide located on our website at www.iif.com/emr/global/
capflows.
IIF CAPITAL FLOWS REPORT COUNTRY SAMPLE (30)

Emerging Europe
Bulgaria
Latin America
(8)
Czech Republic
(8)
Hungary
Argentina
Brazil
Chile
Poland
Colombia
Romania
Ecuador
Russian Federation
Mexico
Turkey
Peru
Ukraine
Venezuela
Emerging Asia
China
Africa/Middle East
Egypt
(7)
India
(7)
Lebanon
Indonesia
Morocco
Malaysia
Nigeria
Philippines
Saudi Arabia
South Korea
South Africa
Thailand
UAE
page 38
GLOBAL MACROECONOMIC ANALYSIS
GLOBAL CAPITAL MARKETS
Charles Collyns, Managing Director & Chief Economist
Hung Tran, Executive Managing Director
Felix Huefner, Chief Economist, GMA Department
Sonja Gibbs, Director, GCM Department
Robin Koepke, Economist
Emre Tiftik, Financial Economist
Arpitha Bykere, Associate Economist
Mohammed Assim, Policy Advisor
Scott Farnham, Research Analyst

Alli Schultz, Senior Program Assistant
AFRICA/MIDDLE EAST DEPARTMENT
ASIA/PACIFIC DEPARTMENT
David Hedley, Chief Economist, Sub-Saharan Africa
J. C. Sambor, Director
Garbis Iradian, Chief Economist, MENA
Bejoy Das Gupta, Chief Economist
Hussein Anooshah, Associate Economist
Feng Guo, Chief Representative, Beijing
Amanda Preston, Senior Program Assistant
Kevin Sanker, Associate Economist
EUROPEAN DEPARTMENT
LATIN AMERICA DEPARTMENT
Clay Berry, Chief Economist
Ramon Aracena, Chief Economist
Ondrej Schneider, Senior Economist
Martin Castellano, Senior Economist
Ugras Ulku, Senior Economist
Maria Paola Figueroa, Economist
Brent Harrison, Program Assistant
Julia Smearman, Research Analyst

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Capital Flows to Emerging Markets

Capital flows to emerging markets have weakened sharply in recent months.

DEEPENING DROUGHT IN 2015

This report is the result of the

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

from a record high of almost 8% in 2007. Moreover, resident outward investment

Inward Portfolio Debt

Inward Portfolio Equity

Source: National Sources, IMF, IIF.

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

International Financial Institutions

Non-Resident Capital Inflows

Resident Capital Outflows

Equity Investment Abroad

On a component basis, portfolio flows account for a significant portion of the

Source: MSCI, Bloomberg, IIF.

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

billion in 2014, in part reflecting cutbacks in spending on commodity-related

Africa & Middle East

Source: National Sources, IMF, IIF.

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

contributed to repeated downward revisions in market expectations of the Feds

Turbulence From China

These fundamental factors weighing against capital flows to emerging markets

Source: Bloomberg, IIF.

announcement by the PBOC that it would shift to a more market-oriented

crisis dimensions. For example, EM exchange rates have dropped sharplyand

Source: Bloomberg, IIF.

Source: Bloomberg, IIF.

Source: Bloomberg, IIF.

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

During recent months, correlations across EM bond markets increased sharply

*A higher value implies higher vulnerability. Source: IIF, Bloomberg.

2000 2002 2004 2006 2008 2010 2012 2014 2016

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

2000 2002 2004 2006 2008 2010 2012 2014 2016

2000 2002 2004 2006 2008 2010 2012 2014 2016

PROSPECTS FOR 2016ONLY A SLOW TURNAROUND

End of an EM Growth Supercycle

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

Market Exp. as of 9/29/2015

Source: U.S. Federal Reserve, Bloomberg, IIF.

Our capital flows

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

EMERGING MARKET EQUITY VALUATIONS: CHEAP ENOUGH FOR RE-ENTRY?

nominal returns over a longer-term horizon as suggested by the negative correlation

2005/15 YTD Avg.

Source: EPFR, IIF estimates; includes mutual funds and ETFs.

1995-15 YTD Avg.

Source: Bloomberg, IIF.

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

Low levels of P/B ratio

Source: Bloomberg, IIF.

Source: Bloomberg, IIF. Based on monthly return data betwen

+1.5 Std. Dev.

-1.5 Std. Dev.

Source: Bloomberg, IIF.

CAPITAL FLOWS TO EMERGING MARKETS | OCTOBER 1, 2015

Source: Bloomberg, IIF.

Source: Bloomberg, IIF.

Source: Bloomberg, IIF. Based on monthly return data betwen

Source: Bloomberg, IIF.