Are Emerging Economies Becoming More Resilient?

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In a recent study, the International Monetary Fund (IMF) reported that the decline in growth prospects has caused a slowdown in net capital flows in 45 emerging markets since 2010.¹ This slowdown has been driven by both a decrease in inflows and an increase in outflows. According to the study, the decrease accounted for 4.9 percent of the sample’s gross domestic product (GDP). Both the decrease in inflows and the increase in outflows occurred across all asset types (that is, debt portfolio, as well as foreign direct investment and other investment).

However, there have been regional differences in the slowdown, with eastern Europe experiencing a more pronounced slowdown in net capital outflows and Latin America suffering less, driven in part by higher flexibility in its exchange rate.

Compared with past episodes where net capital flows slowed down to the point of causing financial and debt crises (the 1980s and 1990s), the study finds that emerging markets are more resilient now. In a 2015 article, I documented the factors that make emerging markets more vulnerable to capital outflows.² Consistent with that study, the IMF’s report finds that, among other reasons, emerging markets are now less vulnerable due to:

• A higher integration in global financial markets
• A larger amount of foreign exchange reserves that they can deploy in case of currency attacks
• Higher flexibility in their exchange rates
• An improvement in their macroprudential policies

The improvement of emerging markets in these areas is particularly important to avoid large depreciations in their currencies and, thus, current account crises that they have previously experienced. It also makes them more resilient to changes in policy announcements by the governments and central banks of more advanced economies. This was a big area of concern during 2008-09, when governments in advanced economies applied expansionary policies as a consequence of the financial crisis that started after the collapse of Lehman Brothers.

The stronger the economic fundamentals of emerging markets are, the more resilient they become to changes in policy announcements and to changes in the prospects for growth.

¹ “Too Slow for Too Long,” International Monetary Fund World Economic Outlook, April 2016.

² Santacreu, Ana Maria. “The Economic Fundamentals of Emerging Market Volatility,” Federal Reserve Bank of St. Louis Economic Synopses, 2015, No. 2, Jan. 30, 2015.

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