IIF: As Trump's Tariff Threats Loom, Foreign Investment in Emerging Markets Will Decline

Forex - The Institute of International Finance (IIF) has stated that global growth will slow down in 2025 and that offshore investors will reduce their cash allocations to emerging markets by nearly a quarter as the policies promised by U.S. President Donald Trump resonate in global markets. The threatened tariffs, a stronger U.S. dollar, and the slower-than-expected interest rate cuts by the U.S. Federal Reserve have already impacted investor plans, according to the IIF. In its semi-annual report, the IIF noted, "The environment for capital flows has become more challenging, reducing investor appetite for risk assets."

This change is most significantly affecting China, while emerging markets outside of China are expected to attract "strong" inflows into bonds and equities, led by resource-rich economies in the Middle East and Africa. In 2024, China is expected to signal foreign direct investment outflows for the first time in decades, and total portfolio flows into the world's second-largest economy are anticipated to turn negative in 2025, with an outflow of $25 billion.

The IIF stated, "This divergence highlights the ongoing resilience of emerging markets outside China, supported by increased risk sensitivity, structural changes such as supply chain diversification, and strong demand for local currency borrowing."

The IIF forecasts that global growth will decline from 2.9% this year to 2.7% in 2025, while emerging markets are expected to grow by 3.8%. However, it predicts that capital flows to emerging markets will fall from $944 billion this year to $716 billion, particularly affected by weak flows to China.

The IIF cautioned that its baseline scenario assumes only selective tariff applications. If Trump’s threat of 60% tariffs on China and 10% on the rest of the world is implemented, the scenario would worsen. The IIF stated, "The U.S. imposing tariffs more robustly and quickly could increase downside risks, exacerbating disruptions in global trade and supply chains, thereby creating additional pressure on emerging market capital flows."