EM Portfolio Flows Tracker 3. Methodology SEPTEMBER 1, 216 The IIF s EM Portfolio Flows Tracker is a monthly indicator that provides timely estimates of total portfolio debt and equity inflows to emerging markets. The Tracker 3. methodology reflects some additional data availability and small methodological improvements. Tracker estimates now rely entirely on an expanded set of high-frequency flows data. Databases with monthly portfolio flows data for the EM total, the major regions, and for individual countries are available on our website at www.iif.com. At the end of each month, we issue a short research note that discusses the latest flows estimates. In that note, we also make use of an econometric model that assesses the drivers of recent portfolio flows, including domestic and external factors. IIF members can subscribe to the release on our website at www.iif.com/email. Robin Koepke SENIOR ECONOMIST Global Macroeconomic Analysis 1-22-857-3313 rkoepke@iif.com Scott Farnham RESEARCH ANALYST Global Macroeconomic Analysis 1-22-857-3653 sfarnham@iif.com TRACKING PORTFOLIO FLOWS TO EMERGING ECONOMIES This note explains the methodology used to estimate the EM Portfolio Flows Tracker. Recent improvements to the methodology include (1) a simplified tracking model that takes into account a broader range of high-frequency flows data, (2) an up-to-date sample period and country sample, and (3) a separate behavioral model that analyzes recent drivers of portfolio flows. As before, monthly flows estimates will be published around the end of each month and are available for download on our website. Our latest data and analysis is available at www.iif.com/ publications/portfolioflows-tracker Chart 1 Net Non-Resident Portfolio Investment Inflows to Emerging Markets $ billion, sum of equity and debt flows 2 Actual Balance of Payments Data Through 215Q4 15 1 IIF Portfolio Flows Tracker (216Q2 Estimate) 5-5 EPFR Fund Flows -1 21 211 212 213 214 215 216 Source: National Sources, EPFR, IIF. iif.com Copyright 216. The Institute of International Finance, Inc. All rights reserved.
page 2 EM PORTFOLIO FLOWS TRACKER 3. METHODOLOGY SEPTEMBER 1, 216 OVERVIEW The Portfolio Flows Tracker is a monthly measure of total portfolio equity and debt flows to the 25 emerging markets for which the IIF publishes capital flows projections. Portfolio flows are arguably the most important capital flows component to track because they are typically the most volatile type of flow and the most susceptible to reversals, playing an important role in driving movements in EM exchange rates and asset prices. We make our latest estimates available on a monthly basis, including a preliminary estimate for the current month and updated estimates for the two prior months. In estimating the Tracker, we proceed in two steps: First, we develop a historical estimate of monthly portfolio flows to all 25 EM economies in the IIF group. This estimate is based on country-level portfolio flows data from countries that publish these data on a timely basis (12 for debt, 14 for equity). About half of the data sources are monthly data published by national central banks with a lag of 1 to 2 months. The other half are daily and weekly data published by national exchanges and central banks with virtually no lag (Table 1). Second, for the most recent months we estimate flows using the most timely data sources. We obtain this estimate by regressing portfolio debt and equity flows as measured by the historical Tracker data on a high-frequency proxy for total portfolio flows based on country-level portfolio flows for those countries that publish daily and weekly data. We also provide regional portfolio flows estimates for the four major emerging market regions: EM Asia, EM Europe, Latin America and Africa/Middle East (Charts 2 and 3). Regional estimates are derived from our total flows estimate, combined with the high frequency flows data for individual countries available for each region. As with the aggregate data, regional estimates are produced for both bond and equity flows and are made available on our website, together with all the country flows data that feed into the estimation of the Tracker. Chart 2 Non-Resident Portfolio Debt Inflows to Emerging Markets $ billion 25 Africa & Middle East Emerging Europe 2 Latin America Emerging Asia 15 1 5-5 -1-15 -2 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16 Aug 16 Source: National Sources, IIF. Chart 3 Non-Resident Portfolio Equity Inflows to Emerging Markets $ billion 25 2 15 1 5-5 -1 Africa & Middle East Latin America Emerging Europe Emerging Asia -15 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16 Aug 16 Source: National Sources, IIF. iif.com Copyright 216. The Institute of International Finance, Inc. All rights reserved.
page 3 EM PORTFOLIO FLOWS TRACKER 3. METHODOLOGY SEPTEMBER 1, 216 ESTIMATING HISTORICAL DATA FOR MONTHLY PORTFOLIO FLOWS The historical Tracker estimates are based on country-level portfolio flows data covering 12 countries for debt flows and 14 countries for equity flows (Table 1). These are the countries that provide timely data on portfolio flows on at least a monthly frequency. Together, these countries typically account for 71% of all portfolio debt flows and 64% of all portfolio equity flows for the IIF EM 25 countries. The data are available with a relatively short lag of 1-2 months (compared to a lag of 3-6 months for most countries quarterly balance of payments data). We obtain our monthly estimate of portfolio flows based on the following two simple regressions: Total_Debt_Flows = 1.86 + 1.67 * Country_Debt_Flows adj. R 2 =.82 (6.29) (.2) Total_Equity_Flows = 1.83 + 1.31 * Country_Equity_Flows adj. R 2 =.86 (2.43) (.13) Total_Debt_Flows (Total_Equity_Flows) are quarterly portfolio equity (debt) inflows to our sample of 25 EM economies, while Country_Debt_Flows (Country_Equity_Flows) are quarterly non-resident portfolio debt (equity) inflows to the selection of countries that Table 1 Data Availability of Country-Level Portfolio Debt and Equity Flows Debt % of Total EM Portfolio Debt Flows (212Q1-215Q4 Avg.) Daily Data (Release lag of 1-1 days) Monthly Data (Release Lag of 1-2 Months) iif.com Copyright 216. The Institute of International Finance, Inc. All rights reserved. % of Total EM Portfolio Equity Flows (212Q1-215Q4 Avg.) Equity Daily Data (Release lag of 1-7 days) Monthly Data (Release Lag of 1-2 Months) India 5.5 X 1.8 X Thailand 2.8 X 4.9 X Korea 5.2 X 16.7 X X Indonesia 6.1 X 2.7 X Philippines 1.4 X Brazil 11. X 7.9 X X Chile 3.1 X 2.7 X Mexico* 17.1 X X 5.7 X Czech Rep.** 3. X.4 X Poland** 3.4 X 3.6 X Ukraine.2 X Turkey*** 8. X X 2.8 X X Hungary* 2.4 X X.8 X South Africa 3. X 3.4 X Total 7.6 7 8 64. 8 9 *For both Mexico and Hungary, monthly and daily debt flows data only cover flows into the sovereign bond market. Daily debt flows are available as stock data in local currency. We obtain flows by differencing the stock data and using daily exchange rate data to convert local currency flows into dollars. **The Czech Republic and Poland provide data in local currency, which we convert into dollars using the average exchange rate for the month. ***Turkey provides weekly data rather than daily data.
page 4 EM PORTFOLIO FLOWS TRACKER 3. METHODOLOGY SEPTEMBER 1, 216 Chart 4 Portfolio Debt Inflows to Emerging Markets $ billion; sample of 25 EMs 12 Actual Balance of Payments Data Through 215Q4 1 IIF Porfolio Flows Tracker (216Q2 Estimate) 8 6 4 2-2 -4 EPFR Fund Flows 21 211 212 213 214 215 216 Source: National Sources, EPFR, IIF. Chart 5 Portfolio Equity Inflows to Emerging Markets $ billion; sample of 25 EMs 8 Actual Balance of Payments Data Through 215Q4 IIF Porfolio Flows Tracker 6 (216Q2 Estimate) 4 2-2 -4-6 EPFR Fund Flows 21 211 212 213 214 215 216 Source: National Sources, EPFR, IIF. publish monthly portfolio flows data. Standard errors are reported in parentheses. The sample period is 212Q1 to 216Q1 for both regressions. We use the coefficients from these regressions for mapping monthly country-level portfolio flows (which are available only for a subset of IIF EM 25 countries) into an estimate of overall monthly portfolio flows. We also tested a number of additional predictors to improve the accuracy of the Tracker, such as EPFR fund flows, asset prices, and issuance data. These do not improve the fit of the model, however. Instead, the simple measure of total inflows to those countries that publish monthly portfolio flows data is a robust predictor of total portfolio flows to EMs. The accuracy of the historical Portfolio Flows Tracker data can be assessed by plotting Tracker estimates against total quarterly portfolio flows data obtained from the balance of payments (Charts 4 and 5). For debt flows, the Tracker is much closer to the actual variable than EPFR fund flows data. For equity flows, the difference is not as large, but again the Tracker clearly follows balance of payments data more closely. Note that EPFR data do not measure non-resident portfolio flows, but rather flows in and out of investment funds. A more detailed discussion of the differences between EPFR fund flows and the IIF Tracker is provided in our Portfolio Flows Tracker FAQ, August 214. REAL-TIME TRACKING OF PORTFOLIO FLOWS For estimating flows in the most recent months, there is a subset of countries that provide high-frequency flows data which can be used as a proxy for overall EM portfolio flows. A set of 1 EM countries publish daily data on equity and/or debt flows that track the corresponding quarterly BoP data closely (plus one country, Turkey, which provides weekly data). These data are published by national central banks or exchanges and are defined as non-resident purchases of stocks and bonds. We use these data to iif.com Copyright 216. The Institute of International Finance, Inc. All rights reserved.
page 5 EM PORTFOLIO FLOWS TRACKER 3. METHODOLOGY SEPTEMBER 1, 216 produce estimates for the current month and the prior month. We also publish a separate daily flows database on our website. In the Tracker 3. methodology, flows estimates for recent months entirely rely on high frequency flows data for individual countries. This is in contrast to earlier versions of the Portfolio Flows Tracker methodology, where estimates for recent months were based on a broader range of data, including bond and equity issuance as well as financial market variables. We have simplified the methodology primarily because the set of high frequency flows data available for individual countries has expanded substantially, greatly reducing the marginal predictive content of additional financial variables. Rather than including financial variables in the tracking estimates, we now analyze financial developments in a separate econometric model geared towards assessing the drivers of portfolio flows (see below). The regression results for mapping high-frequency (HF) flows into overall portfolio flows are as follows: Total_Debt_Flows = 4.39 + 2.18 * HF_Country_Debt_Flows adj. R 2 =.82 (1.43) (.19) Total_Equity_Flows = 4.83 + 1.54 * HF_Country_Equity_Flows adj. R 2 =.86 (.4) (.6) This regression is based on monthly data from January 212 to May 216 (53 observations). The left-hand side measure of total flows is the historical data obtained from the first set of regressions reported on page 3. The right-hand variable is a monthly aggregate of the high-frequency flows that are available with a very short publication lag. A BEHAVIORAL MODEL FOR PORTFOLIO FLOWS In addition to the tracking models, we have also developed an econometric model geared towards analyzing the drivers of recent portfolio flows dynamics. The model builds on previous IIF analysis provided in the Working Paper Fed Policy Expectations and Portfolio Flows to Emerging Markets, May 214. As is common practice in the literature, the model distinguishes between domestic ( pull ) factors and external ( push ) factors affecting capital flows. The specific variables used in our model are (1) an indicator of global risk aversion (the U.S. BBB-rated corporate bond spread over Treasuries, specified as the change in basis points from the prior month); (2) a variable capturing changes in market expectations of U.S. monetary policy, as measured by federal funds futures contracts 36 months out (building on our research showing that investors tend to increase their allocations to emerging markets when they expect easier Fed policy and vice versa), and (3) an EM stock market index that serves as a proxy for domestic economic developments in emerging markets. Detailed estimation results are provided in Table 2. iif.com Copyright 216. The Institute of International Finance, Inc. All rights reserved.
page 6 EM PORTFOLIO FLOWS TRACKER 3. METHODOLOGY SEPTEMBER 1, 216 Chart 6 compares the estimated flows obtained from the behavioral model to those from the tracking model. The two series match each other closely, suggesting that the model captures the underlying drivers of portfolio flows quite well. A decomposition of recent portfolio flows drivers is provided in Chart 7. The results suggest that swings in investor risk aversion have been the most important driver of recent portfolio flows dynamics, followed by domestic developments in EMs. The outlook for Fed monetary policy has generally served as an automatic stabilizer in the recent period, with shifts in investor expectations towards more dovish policy cushioning the decline of flows during risk-off periods and anticipation of additional Fed tightening holding flows back during periods when flows returned to EMs. Table 2 Model Estimates for the Drivers of EM Portfolio Flows model estimated for the period 21-216 Dependent Variable: Total EM Portfolio Flows Constant Term 7.7 *** (.) Upward Shifts in Fed Rate Expectations -38.*** (.2) Downward Shifts in Fed Rate Expectations -5.48 (11.28) BBB Spread (Proxy for Risk Aversion) -47.83*** (12.58) MSCI EM Stock Market Index 1.58 *** (.35) Adjusted R 2.46 Number of Observations 77 Notes: Asterisks denote statistical significance at the 1, 5, and 1 percent level for 1, 2, and 3 asterisks, respectively. Standard errors are reported in parentheses. The sample period is from January 21 to May 216. We find evidence that the magnitude of the constant term has been smaller in the recent period (since early 215), a period in which flows have been much more subdued compared to the post-crisis years. The constant term estimated for the 21-214 period is 2.2. Chart 6 Portfolio Flows Tracker vs. Behavioral Model $ billion; sum of equity and debt flows 8 6 4 2-2 Portfolio Flows Tracker Behavioral Model -4 21 211 212 213 214 215 216 Source: IIF. Chart 7 Contributions from Drivers of Portfolio Flows $ billion* Domestic Factors 5 Fed Policy Expectations 4 3 2 1-1 -2 Risk Aversion Constant Term Total -3 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16 Aug 16 *Based on behavioral model. Source: IIF. iif.com Copyright 216. The Institute of International Finance, Inc. All rights reserved.