Despite global monetary tightening, which has historically prompted financial trouble in the emerging world, capital flows into emerging markets have remained largely resilient even as global capital flows have fallen.
In its latest External Sector Report, the International Monetary Fund (IMF) said net capital inflows into emerging markets – excluding China – rose to US$110 billion or 0.6 per cent of GDP last year, the highest level since 2018.
“We know that rapid monetary tightening in the US and a strong dollar can lead to sudden capital flight and financial crises in the emerging world. The good news is that we have not seen an emerging market crisis,” the IMF said.
It explained that while emerging markets have seen a decline in more volatile net portfolio inflows, net inflows of foreign direct investment have been more stable.
Behind this resilience in an environment of global monetary uncertainty are “stronger fundamentals”, the monetary fund said, noting that many countries in the emerging world are now benefiting from more robust fiscal, monetary, and financial policy frameworks, as well as more effective implementation of policies and tools.
Meanwhile, China recorded net capital outflows, including negative net FDI inflows over 2022–23.
“Some of this may reflect multinational firms repatriating earnings. But it may also reflect shifting expectations about Chinese growth and geo-economic fragmentation,” the IMF said.
Overall, in 2022–23, global gross inflows declined from 5.8 to 4.4 per cent of world GDP, or from $4.5 trillion to $4.2 trillion, relative to 2017–19, in line with global gross outflows.
“The decline masks large differences across countries,” the monetary fund said.
The IMF highlighted the US accounted for as much as 41 per cent of global gross inflows – almost double its 23 per cent share in 2017–19. Gross outflows from the US similarly increased, from 14 to 21 per cent of global gross outflows.
“This may be evidence of increased financial fragmentation but could also partly reflect an unwinding of some tax or regulatory strategies by large multinational corporations in financial centres, whose share of global flows has declined drastically,” the monetary fund said.
It added that in order for emerging markets to overcome the possibly higher-for-longer US interest rates, they must double down on recent improvements to macroeconomic frameworks, more effective policies and stronger institutions.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
