WASHINGTON May 29 Private capital flows to emerging markets are likely to drop to their lowest level in five years in 2014 as money going to Russia dries up due to Moscow's conflict with Ukraine, a global financial industry group forecast on Thursday.
Tensions between Russia and Ukraine have already squeezed money coming into Russia, especially bank lending, and the Institute for International Finance said the threat of new sanctions against Moscow has also contributed to huge resident outflows.
The IIF, which counts some of the world's largest banks among its members, said $63 billion left Russia in the first quarter of this year, the biggest outflow from the nation since the height of the financial crisis in 2008.
Globally, the group expects net private inflows to emerging markets to total $1.032 trillion this year, $47 billion less than it predicted in January and the lowest level since $692 billion in 2009. Its thrice-yearly report tracks flows to 30 large emerging-market countries and provides some of the most authoritative data on capital movements.
"The main negative factor has been a large downward revision in capital flows to Russia," Charles Collyns, the IIF's managing director and chief economist, told reporters.
The IIF said China also had contributed to the lower level of inflows with efforts to stem short-term capital inflows to prevent currency appreciation that hurts its exports.
But not all investment has dried up. Emerging markets attracted $45 billion from global stock and bond investors in May, the highest level of portfolio inflows since September 2012, the banking group said.
Net private inflows into emerging markets should rebound in 2015, as long as the conflict between Ukraine and Russia recedes and the U.S. Federal Reserve raises interest rates as slowly as it has promised over the next few years, the IIF said.
Private investors are also likely to seek higher yields in emerging markets as long as the leading rich economies keep rates at historic lows and pump more money into the global economy. The IIF noted that the global appetite for risk is at multiyear highs.
But the tide could turn. If the tolerance for risk tumbles back to its long-term average since 2000, that could sap $53 billion from equity and bond flows into emerging markets, the IIF predicted. (Reporting by Anna Yukhananov; editing by Matthew Lewis)