Net inflows of non-resident capital to Türkiye are expected to surge in 2025, provided that orthodox macroeconomic policies are sustained, the Institute of International Finance (IIF) said in a recently published report, providing an optimistic outlook for resurgence across the vast majority of emerging markets (EMs) this year.

"Authorities have communicated their commitment to maintain a tight policy stance until significant strides are made in curbing inflation and steering inflation expectations on a downward trajectory," IIF said in the report evaluating capital flows to emerging economies.

It said tighter macroeconomic policies helped Türkiye to narrow its current account deficit to $10.9 billion in the first quarter of this year, down from $24.6 billion in the same period of last year, adding those policies attract sizable net inflows of non-resident capital.

The near-term prospects for net capital flows to Türkiye hinge on whether resident and non-resident investors will find the wider spreads offered by Turkish assets attractive enough, especially considering that continued tight, or even tighter policies will further reduce the country's external and internal vulnerabilities, such as its narrowing current account deficit and easing inflation, it added.

Major developing economies are expected to see net capital inflows this year rise by nearly a third to $903 billion although much of that hinges on global growth holding up, the banking trade group's report said.

The 32% net increase is expected to be mostly driven by a strong recovery in foreign direct investment (FDI) and by cash directed at equity portfolios, said the report by IIF, which covers 25 countries across emerging markets, including China, India, Russia and Mexico.

Even as global growth, seen at 3.1% this year, is forecast to be below the 3.8% average through 2000-2019, "a global 'soft landing' scenario makes for a positive picture for capital flows to EMs," said the report, which was published late on Wednesday.

"Global trade has also shown signs of a modest recovery in the past few months, driven by a pickup in EM trade volumes."

Capital flows are a component of a country's balance of payments, alongside the current account balance and changes in reserves. Non-resident capital flows consist mostly of foreign direct investment, as well as portfolio investments into stocks and bonds.

Net inflows of FDI are projected to jump to $426 billion in 2024, while net flows into foreigners' portfolios could hit $259 billion, from $161 billion in 2023, as China, a massive source of outflows over the last two years, modestly recovers.

The report's universe includes six economies each from Emerging Europe, Latin America and Africa/Middle East, and seven from Asia.

Across other geographical regions, robust growth and solid macro fundamentals will drive a rebound in foreign capital flows to Asia excluding China.

JPMorgan's inclusion of India in its benchmark local currency bond index, which is due to begin next month, "could lead to additional inflows into local currency-denominated government debt and bring down bond yields, while also providing some support for the rupee," the IIF report said.

FDI outflows from Russia are expected to continue, but net flows will be positive in Emerging Europe partly due to an increase in FDI flows to Hungary.

In Africa and the Middle East, the IIF estimates $149 billion in net nonresident capital flows, compared to $115 billion last year, with net outflows of resident capital expected to moderate as well.

Egypt, Saudi Arabia and the United Arab Emirates (UAE) should account for 80% of the region's inflows according to the report.

The IIF inflow projections to emerging economies rely on an acceleration in economic growth from EMs, coupled with "significant" rate cuts in the developed economies.

Türkiye projection

On the Türkiye side, the Washington-based association said it expects that wider interest rate spreads will help the country to attract sufficiently large capital flows to finance smaller current account deficits of 2.6% of gross domestic product (GDP) in 2024, and 2.2% in 2025, down from 4.2% in 2023.

"We project that such an external financing scenario will align with a slowdown in real GDP growth from 4.5% in 2023 to 3.5% in 2024 and further down to 2.5% in 2025," said the report.

The IIF also forecasts net foreign borrowing in the form of loans from non-resident creditors should decline, reflecting slowing real GDP growth and weaker credit demand.

The association expects net non-resident capital inflows to moderate slightly from $66 billion in 2023 to $62 billion in 2024, before picking up to $68 billion in 2025.

"The primary downside risk is a deterioration in investor sentiment towards Turkish assets, which could be triggered by a premature easing of policies or failure to achieve the projected reduction in inflation and the current account deficit," the report noted.

Türkiye walked away from a period of lower monetary policy last year as the central bank embarked on a tightening drive that lifted its benchmark policy rate to 50% from 8.5% to rein in inflation. In its last meeting, it kept the rates on hold but vowed to tighten further if the inflation outlook worsens.