Latam Charts: Capital Account Updates

• EM net non-resident portfolio flows remain well below their pre-pandemic numbers. The gap is even bigger when one abstracts net inflows to China from the aggregate EM numbers.

• In Latam, IIF daily estimates imply that Brazil and Colombia have outperformed the rest of EM with nearly complete recoveries in net foreign flows into their fixed-income and equity markets. In contrast, Mexico’s net non-resident portfolio flows remain close to their 2020 nadir.  

CAPITAL CONTRASTS

Daily IIF data on net non-resident portfolio flows to emerging markets (EMs) show partial recoveries from their deep pullback during 2020, but cumulative numbers remain well below their pre-pandemic levels (chart 1). Moreover, the return of foreign capital has been even more anaemic when compared with the rebound from past financial crises (chart 1, again). When one removes net inflows to China from the data, the picture looks even softer (chart 2).

Looking specifically at available data on Latam’s major markets, investor flight last year from Mexico was amongst the quickest and deepest, and has remained quite persistent, notwithstanding an anomalous jump in the numbers in late-2020 related to rollovers of public-debt instruments. Although Mexico’s real interest rates have been amongst the highest in both the Latam and EM spaces over the last year and a half (chart 5, p. 3), this hasn’t been enough to compensate for other factors that have weighed on Mexican markets. In contrast, Brazil and Colombia appear to have seen nearly complete reversals of the foreign-capital outflows they experienced last year. High-frequency data on Argentina, Chile, and Peru are not available given the smaller size of their markets.

Quarterly balance-of-payments data capture 2020’s outflows (chart 3), but are too lagged to incorporate yet both the rebounds and the extended doldrums reflected in the high-frequency daily estimates.

IIF estimates of total external financial and capital account net flows into EMs rank Colombia, Chile, and Peru amongst the best performing countries during 2020–21 (chart 4). This reflects, in part, the substantial foreign-currency government bond issuance by all three countries and their subsequent uptake by international investors. Net international participation in EM local-currency debt markets in 2021 has been limited so far compared with 2020, where Colombia and Peru both saw substantial inflows from foreign buyers (chart 5). Looking ahead, heavy positioning against Mexico may be set for the most substantial unwind.

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