Publications /
Policy Paper

Back
Capital flows and emerging market economies since the global financial crisis
Authors
January 20, 2023

This paper was originally published as a chapter within the Book, Foreign Exchange Constraint and Developing Economies, published on January 2023 (ISBN  978 1 80088 049 8).

 

The decade after the global financial crisis (GFC) of 2007–2009 saw signifi- cant changes in the volume and composition of capital flows in the global economy. Portfolio investments and other non-bank financial intermediaries (NBFIs) are behind an increasing share of foreign capital flows, while bank- ing flows have shrunk in relative terms. This chapter approaches the implica- tions of such a metamorphosis of finance for capital flows to emerging market economies (EMEs).

Changes in capital flows accompanied structural shifts in financial inter- mediation in capital-source countries, with NBFIs increasingly shaping the demand for and supply of liquidity in financial markets. The channels of systemic risk propagation have changed with the higher profile acquired by NBFIs, with leverage fluctuations through changes in margins rising in weight.

Risks associated with capital flows to EMEs have changed accordingly. Foreign capital potentially brings benefits to EMEs. However, wide swings in capital flows carry high risks to macroeconomic and financial stability, including the adverse effects of sudden stops to capital inflows and challenges faced by economies with weaker institutions and less-developed financial markets.

Capital inflows in emerging market economies are driven by both global and country-specific drivers. The abundance of global liquidity since the GFC has pushed investors to search for yield, with shifts in risk appetite becoming a source of fluctuations. On the other hand, changes in the macroeconomic fundamentals and institutional frameworks of EMEs have made investors more selective.

The weight of global factors came to the fore in the first half of 2020, when the financial shock in advanced economies caused by coronavirus outbreaks led to a substantive wave of capital outflows from emerging markets, with unprecedented speed and magnitude. The shock was mitigated subsequently by central banks’ counter-shock policy moves in source countries, as well as by EME policy tools in managing the risks associated with extreme shifts in capital flows.

The chapter first examines the metamorphosis of finance and of capital flows after the GFC, up to the shock to capital flows to EMEs during the 2020–2021 coronavirus crisis. Then we analyse the extent to which normali- zation of monetary policies in advanced economies may lead to shocks in those flows, as well as why exchange-rate fluctuations between the US dollar and other major currencies can affect capital flows to EMEs. Finally, we assess the range of policy instruments that EME policymakers tend to resort to when managing risks derived from capital-flow volatility.

RELATED CONTENT

  • Authors
    Sous la direction de Larabi Jaïdi
    Muhammad Ba
    Marouane Ikira
    Pierre Jacquemot
    Brian Kelly Nyaga
    Leo Kemboi
    Moubarack Lo
    Mouhamadou Ly
    Solomon Muqay
    Dennis Njau
    Meriem Oudmane
    Kwame Owino
    Faith Pittet
    Amaye Sy
    September 29, 2022
    La succession des chocs pandémique, climatique et géopolitique a éprouvé les économies africaines. Les liens commerciaux et financiers avec le monde ne sont plus seulement considérés comme des moteurs de performance, mais aussi comme des sources potentielles de vulnérabilité. La défiance à l’égard de la mondialisation s’est accrue. Parce qu’elle est venue souligner la dépendance du continent, le dérèglement de ses rapports à la nature et sa vulnérabilité face aux tensions géopolitiq ...
  • Authors
    Inácio F. Araújo
    Fatna El Hattab
    Soulaimane Anis
    June 30, 2022
    Depuis l’année 2015, le Maroc a fait de la régionalisation avancée un choix stratégique pour concrétiser sa volonté politique de mettre en œuvre une approche de développement territorial plus intégrée. Cette initiative vise à assurer un développement territorial durable, robuste et inclusif mais aussi à capitaliser sur les potentialités de chaque région en termes de ressources. Ainsi, de nouvelles structures ont été mises en place pour moderniser les services publics et améliorer le ...
  • Authors
    Rishita Mehra
    June 24, 2022
    For today’s middle-income countries in Africa, innovation is essential to sustain growth and promote the transition to high-income status. This paper begins by providing an in-depth review of the region’s innovation performance during the last three decades. A distinction is made between residents and non-residents, and outcomes at different income levels. Using cross-country regressions, we then study the determinants of innovation and assess the impact of innovation on growth in t ...
  • Authors
    Moubarack Lo
    Mohamed Ben Omar NDIAYE
    June 15, 2022
    La question de la mise en œuvre du projet de monnaie unique de la CEDEAO a encore été au centre des discussions entre les chefs d’État de la CEDEAO lors de leur 57ème session ordinaire, tenue à Niamey le 7 septembre 2020, et lors de laquelle ils ont décidé pour diverses raisons un nouveau report à une date ultérieure, après ceux de 2003, 2005, 2009 et 2015. Les chefs d’État ont aussi évoqué l’élaboration d’une « nouvelle feuille de route », sans toutefois déterminer u ...
  • June 10, 2022
    The latest IMF projections indicate that global growth will be 4.4% in 2022 after 5.9% in 2021. These projections make us very optimistic for the future, but they certainly cannot heal th ...
  • Authors
    February 3, 2022
    COVID-19 has ravaged nearly every country in the world, with the globalization of recent decades intensifying its spread. As of mid-2021, the world had spent $16.5 trillion—18% of global GDP—to fight the disease. And that amount does not even include the most important losses such as deaths, mental health effects, restrictions on human freedom, and other nonmonetary suffering. Nearly 90% of this spending was by developed economies, with the rest by emerging market and developing eco ...
  • Authors
    Alessandro Minuto-Rizzo
    Alessandro Politi
    Claire Spencer
    Abdulaziz Sager
    Mahboub E. Hashem
    Matt Herbert
    Umberto Profazio
    Eman Ragab
    Brahim Oumansour
    Ashraf Mohamed Keshk
    Jean-Loup Samaan
    Ahmad Masa’deh
    Giovanni Romani
    November 11, 2021
    Since its very beginning in 2011, the Middle East and Deep Maghreb have been a fundamental priority for the Foundation. As this year marks the 10th anniversary of the Arab uprisings, our Dossier wants to provide a meaningful understanding of the future dynamics of an area that, despite several positive attempts, is still affected by major instability. Gathering the perspectives of a pool of distinguished regional and international analysts, this publication dives into the socio-econ ...
  • July 14, 2021
    This book aims to address job creation in Morocco in the context of a new export-driven growth model. Prior to the COVID-19 pandemic, the unemployment situation in Morocco was serious, particularly among young people. Morocco’s competitive edge in the global market had been eroding, especially in labor-intensive, low-wage industries that typically create large numbers of jobs. The COVID-19 pandemic has created further setbacks to the economy in 2020 and beyond, including a collapse ...
  • June 17, 2021
    Africafé reviens ce jeudi 17 juin à 17h30 avec un nouvel épisode. Présenté par Youssef Tobi, spécialiste en relations internationales, Africafé décrypte l'actualité des organisations africaines et du continent avec des experts africains. Dans cet épisode, Youssef El Jai donne une vision...