How Trump’s Policies Could Impact Capital Flows to Emerging Markets

Global growth is expected to slow down in 2025, with foreign investors likely to reduce their investments in emerging markets by nearly 25%, according to the Institute of International Finance (IIF).

This forecast is driven by the policies of the new U.S. President, Donald Trump. Trump’s plans for a significant overhaul of the U.S. government, just hours after taking office, are already influencing investor decisions.

The threats of tariffs, a stronger dollar, and slower-than-expected interest rate cuts by the Federal Reserve are making the capital flow environment more challenging. The IIF reports that these factors are moderating investors’ appetite for risky assets.

China is being hit particularly hard, while other emerging markets, especially those rich in resources in the Middle East and Africa, are expected to attract robust flows of bonds and stocks.

In 2024, China experienced its first negative flow of foreign direct investment in decades. The total portfolio flows to China, the world’s second-largest economy, are projected to turn negative. An outflow of $25 billion is expected in 2025.

How Trump’s Policies Could Impact Capital Flows to Emerging Markets. (Photo Internet reproduction)

This divergence highlights the continued resilience of non-Chinese emerging markets. They are supported by improved risk sentiment, structural changes like supply chain diversification, and strong demand for local currency debt.

Global Growth Outlook

The IIF projects global growth to moderate to 2.7% in 2025, down from 2.9% this year. Meanwhile, emerging markets are expected to grow at 3.8%.

However, capital flows to emerging markets are forecast to drop to $716 billion, compared to $944 billion this year. This decline is primarily due to weaker flows to China.

The IIF warns that its base scenario assumes only selective implementation of tariffs. If Trump’s threatened tariffs of 60% on China and 10% on the rest of the world are implemented, the situation could worsen.

“A more robust and rapid implementation of tariffs by the U.S. could exacerbate risks, amplifying global trade and supply chain disruptions, and putting additional pressure on emerging market capital flows,” the IIF stated.