In 2015, for the first time for over three decades, emerging markets will record a net negative investment flow. According to estimates by the Institute of International Finance (IIF), this year there will be a net outflow from emerging markets of $540 billion, compared with an inflow of $320 billion last year.
In effect, capital is fleeing in alarm from countries that until not long ago were considered highly attractive for investment. The countries in question are China, India, Russia, and Brazil of course, but there are also other countries suffering from the phenomenon, among them Turkey and countries in East Asia. The substantial slowdown in global economic growth, the slide in commodity prices, and the possibility that dollar interest rates will rise - these are the factors behind the capital flight. To these must be added the developments on the Shanghai Stock Exchange, and the Chinese government's failed attempt to deal with them.
The Global Financial Stability Report released at the annual meeting of the International Monetary Fund indicated one of the most worrying phenomena in the rapid movements of capital. When the money flowed quickly to emerging markets, especially to China, many companies found ways of obtaining accessible and fairly cheap finance. According to the Global Financial Stability Report, the total debt to bondholders of corporations in emerging markets grew fivefold in the decade to 2014, to $18 trillion, two thirds of which is owed by Chinese companies.
These investments are now considered at risk, and they are being withdrawn fast. As mentioned, this is not just affecting China, although the Chinese economy is the main focus of concern at present. Other economies, such as Russia, Brazil, Turkey, and in East Asia, are already feeling the consequences of the corporate debt crisis. The crisis will only worsen with every company that declares insolvency.
No room for Israeli complacency
Something that raises many questions is the fact that the Israel economy is at the margins of the rapid flight of capital from these economies. To exemplify this, it is necessary to look at investment in securities, which has been the main problem in the emerging markets in the past few months. According to Bank of Israel data released this week, the first half of 2015 saw net realizations of investments in securities of about $1 billion, which compares with positive net investment of $9.6 billion in 2014.
Much more important is the fact that the sale of investments by overseas investors was not mainly of bonds, but of stocks and treasury bills - this according to Central Bureau of Statistics figures. Foreign investment in Israeli corporate bonds is still small, and not systemic. In other words, as far the developing crisis in the emerging markets is concerned, Israel is out of the picture. Nothing testifies to this better than the level of the shekel exchange rate, which has not undergone the accelerated depreciation of the currencies of Brazil, Mexico or Turkey.
Moreover, the Israeli economy is not a bad solution for funds obliged by their investment policy to channel money to "emerging markets". The money being withdrawn from Turkey, from Russia or East Asia is finding its way to Israel. The local economy is not identified with commodity prices, unlike other emerging markets. On the other hand, the ratio of debt to GDP in Israel is 67%, in contrast to many industrialized economies. If we add to that the fact that the Israeli economy has a balance of payments current account surplus, the result is that it is most attractive.
All this does not mean that there is no chance of problems developing in the future. Both the sharp fall in the growth rate and the fears of fiscal policy losing direction could lead to a switch in the attitude of foreign investors to Israel. At present, these are problems on the distant horizon. For the time being, it is structural factors, much stronger than the short term interest rate, that are causing the flows of capital to the Israeli economy.
Published by Globes [online], Israel business news - www.globes-online.com - on October 13, 2015
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