Ghosts of tantrums past trigger first emerging market outflows since 2016: IIF

LONDON (Reuters) - The recent run up in the dollar and global borrowing costs has led to the first monthly outflow of foreign money from poorer “emerging” economies since 2016, estimates compiled by the Institute of International Finance show.

A man stands next to a board that shows the Real-U.S. dollar and several foreign currencies exchange rates in Rio de Janeiro, Brazil, January 21, 2016. REUTERS/Pilar Olivares

A new IIF report said the rising pressure from the dollar and bond yields has exhumed “the ghost of tantrums past” and caused a $0.5 billion outflow when combining figures from EM stocks funds and bond funds.

It was referring to the “taper tantrum” of 2013 when the U.S. Federal Reserve first hinted that it was looked to wind in the stimulus used to combat the financial crisis.

The April retrenchment was mostly concentrated in Asia, with combined debt and equity outflows amounting to some $7.8 billion. In contrast, foreign demand for Latin American securities was robust at about $6.8 billion.

“The rise of 10-year U.S. Treasury yields -- in tandem with a stronger dollar -- have been the key drivers of this downturn,” the authors of the IIF study said.

“Indeed, foreign investors have withdrawn more than $5.5 billion from EM debt markets since April 16, a slightly faster pace than that seen during the taper tantrum in May 2013.”

After a fast start to the year, net capital inflows to emerging markets which are a broader measure of cross-border flows, amounted to $77 billion in the first three months of 2018 which was still the largest net gain in four years.

For now though the tide has turned. The dollar has surged over three percent in two weeks and U.S. Treasury yields US10YT=RR - a major driver of global borrowing costs - have broken above three percent for the first time in four years.

That has caused familiar jitters about the mountain of dollar-denominated debt that has been issued in the developing world in recent years.

They have borrowed at vastly cheaper rates by using dollars, but the rise in the U.S. currency now makes the repayments more costly unless they have been hedged.

The Bank for International Settlements this week said that a record 22 percent surge in debt sales last year pushed up the annual growth in EM dollar debt 10 percent to $3.7 trillion.

(This version of the story adds dropped word ‘billion’ in second paragraph.)

Reporting by Marc Jones, Editing by William Maclean