IMF says emerging market capital inflows recover to 2018 levels

WASHINGTON, July 12 (Reuters) - The International Monetary Fund on Friday said gross capital inflows into emerging markets excluding China last year rose to $110 billion or 0.6% of their economic output, the highest level since 2018.

The findings, part of the IMF's External Sector Report on currencies, capital flows and financial imbalances, show some resilience among emerging markets despite sharply higher U.S. interest rates that have drawn funds into dollar assets.

The IMF said in the report that emerging markets have seen a decline in the more volatile net portfolio inflows, but net inflows of foreign direct investment (FDI) has been more stable.

"This is partly because of stronger fundamentals," the IMF said in a blog posting accompanying the report. "Indeed, many countries are now benefiting from more robust fiscal, monetary and financial policy frameworks, as well as more effective implementation of policies and tools.

At the same time, the report said that China saw net capital outflows over the 2022-2023 period, including net negative FDI inflows.

"Some of this may reflect multinational firms repatriating earnings. But it also may reflect shifting expectations about Chinese growth and geo-economic fragmentation," the IMF said.

Overall, global gross capital inflows declined to 4.4% of global GDP, or $4.2 trillion, in the 2022-2023 period, from 5.8 percent of global GDP, or $4.5 trillion, in 2017-2019.

The IMF said this partly reflects a retrenchment of capital flows, with foreigners buying fewer local assets and residents buying fewer assets abroad.

But the U.S. benefited strongly from the shifts, accounting for 41% of global gross inflows during the 2022-2023 period, nearly double its 23% share in 2017-2019. The U.S. share of global gross outflows also increased, to 21% from 14% during the same periods.

This may reflect increased financial fragmentation, but it also may reflect an unwinding of some tax and regulatory strategies by large multinational corporations.

The report also showed that the U.S. dollar's real effective exchange rate was overvalued relative to U.S. GDP by a median of 5.8% in 2023. The euro was undervalued by 1.7%, the yen was overvalued by 1.7% and the yuan was overvalued by 0.7%, the report showed. (Reporting by David Lawder, Editing by Franklin Paul and Alistair Bell)