The International Monetary Fund (IMF) said in its recent report that gross capital inflows into emerging markets (EMs) excluding China last year rose to $110 billion, or 0.6% of their economic output, the highest level since 2018 but remained negative due to various factors.
The findings, part of the IMF's External Sector Report on currency, capital flows and financial imbalances, show some resilience among emerging markets despite sharply higher U.S. interest rates that have drawn funds into dollar assets.
The IMF said in the report on Friday that emerging markets have seen a decline in the more volatile net portfolio inflows, but net inflows of foreign direct investment (FDI) have been more stable.
Gross inflows and outflows in emerging markets decreased last year, according to the report that provides an external sector assessment of 30 of the world's biggest economies based on their 2023 data.
"Against this background, the global current account balance narrowed significantly in 2023, while the excess global current account balance has remained broadly unchanged relative to 2022," it added.
The narrowing reflects a reversal of large current account surpluses in commodity-exporting countries. Continued recovery from the COVID-19 pandemic and a slowdown in global trade in goods during 2023 also contributed, the IMF said.
The medium-term outlook indicates a continued narrowing of the global current account balance, supported by fiscal consolidation efforts in current account deficit countries and moderation in commodity prices, according to the lender.
However, there is a high degree of uncertainty surrounding this outlook. "Risks include delays in the implementation of projected fiscal consolidation and heightened uncertainty about the commodity market outlook in view of geopolitical tensions, as well as the intensification of geoeconomic fragmentation and a prolonged real estate slowdown in China."
At the same time, the report said that China saw net capital outflows over the 2022-2023 period, including net negative FDI inflows.
"Some of this may reflect multinational firms repatriating earnings. But it also may reflect shifting expectations about Chinese growth and geo-economic fragmentation," the IMF said.
Overall, global gross capital inflows declined to 4.4% of global gross domestic product (GDP), or $4.2 trillion, in the 2022-2023 period, from 5.8% of global GDP, or $4.5 trillion, in 2017-2019.
The IMF said this partly reflects a retrenchment of capital flows, with foreigners buying fewer local assets and residents buying fewer assets abroad.
But the U.S. benefited strongly from the shifts, accounting for 41% of global gross inflows during the 2022-2023 period, nearly double its 23% share in 2017-2019. The U.S. share of global gross outflows also increased, to 21% from 14% during the same periods.
This may reflect increased financial fragmentation, but it also may reflect an unwinding of some tax and regulatory strategies by large multinational corporations.
The report also showed that the U.S. dollar's real effective exchange rate was overvalued relative to U.S. GDP by a median of 5.8% in 2023. The euro was undervalued by 1.7%, the yen was overvalued by 1.7% and the yuan was overvalued by 0.7%, the report showed.
For Türkiye, the IMF cited a weaker position than medium-term fundamentals but noted that tightening the monetary and fiscal policy stance would contain demand and improve the CA balance.
Turkish authorities delivered last year a shift in monetary stance that resulted in raising interest rates, reducing risk premiums and improving the credit rating.
Net capital inflows increased to 4.9% of GDP in 2023 from 3.9% of GDP in 2022, driven by increased borrowing in the banking sector, according to the IMF report.
Portfolio investments also turned positive after the May 2023 election and recorded a net inflow of 0.8% of GDP in 2023 while direct investment recorded a moderate net inflow of 0.4% of GDP, the IMF said.
The FDI inflows for the first five months of 2024 in Türkiye amounted to $3.8 billion, dropping 15% compared to the same period last year, according the data from the International Investors’ Association (YASED), citing data from the central bank on Friday.
In 2023, Türkiye attracted $10.6 billion in FDI, while this figure stands at $267 billion since 2002, according to the association.