Capital outflows to push emerging markets into crisis, cautions IMF

By Staff Writer

Apr 07, 2016 08:34 PM EDT

Massive cash outflows from emerging markets of late could cause another bout of crisis in emerging markets as warned by International Monetary Fund (IMF). The slower growth in developing economies is resulting in exodus of capital outflows. 

International Monetary Fund has highlighted that narrowing differential in growth prospects between advanced and emerging economies could result in another bout of crisis. Adding to this, weak risk appetite of investors and comparative interest rates in developed and developing markets are causing mismatch for global investments. The 2013 'taper tantrum' when US adopted tighter monetary policy also caused outflows. 

The Wall Street Journal (WSJ) reports that global investors parked their funds in emerging markets for several years, banking on higher growth rates. Now, emerging markets are suffering from lower growth rates. China, Russia and other emerging markets are recording low growth rates and this is less of a growth premium to the US and Europe. Hence, funds are shifting to developed economies. 

IMF, in its latest study on World Economic Outlook, stated "Much of the decline in inflows can be explained by the narrowing differential in growth prospects between emerging market and advanced economies. Both the weaker inflows and stronger outflows have contributed to the slowdown."

The National further adds that capital flows into emerging market economies dropped by $1.1 trillion during the past five years to 2015. Emerging markets are suffering from lower growth rates and this has eroded advantage factor over developed economies. It'll be costly economic crises for emerging economies, said IMF. Emerging markets account for a larger chunk in the global economy than it used to be few years ago. 

Since 2010, there has been an estimated drop of 45 key emerging markets to the tune of over $1 trillion. China's economic slowdown contributed to half of the total decline among emerging markets. Another major economy Russia was facing economy sanctions and drop in oil prices as well. 

Moreover, spillover effects from emerging markets could also impact BRICS nations as well. Spillover effects from emerging markets are higher today than they were during the days of financial crisis in 2008. Spillover effects in BRICS (Brazil, Russia, India, China and South Africa) rose 40 percent. If any crisis takes place in emerging economies, it'll have more impact on the rest of the world as well, as reported by LiveMint

The reversal capital flows are equivalent to an outflow of 1.2 percent of gross domestic product (GDP) during the past four quarters, according to IMF. This is against the 3.7 percent inflow of GDP in 2010. The slowdown during the last three quarters of 2015 impacted most of the capital inflows and outflows. This is the third major pullback in three decades for emerging markets. 

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