Capital flowing to emerging economies: IMF

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Capital flowing to emerging economies: IMF

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IMF claims capital flows to emerging economies as the world economy limps out of financial crisis.

16 September,2012 06:56 pm

As the world economy limped out of the global financial crisis, there was a resurgence of capital flows to emerging market economies (EMEs)—followed by an even sharper reversal in the aftermath of the U.S. sovereign downgrade.The International Monetary Fund (IMF) in its latest report said that recent months have seen capital flows to EMEs resume again.After collapsing during the 2008 global financial crisis, capital flows to emerging market economies surged in late 2009 and 2010, raising both macroeconomic challenges and financial-stability concerns.It said by the second half of 2011, however, capital flows receded rapidly, eliminating much of the cumulated currency gains, and leaving EMEs grappling with sharply depreciating currencies in their wake. The trend seems to have reversed again since the beginning of 2012, with flows to EMEs rebounding, and in some cases reaching the peaks seen in 2010 and early 2011.The report said while such volatility is nothing new—historically, capital flows have been episodic—it has reignited questions aboutthe nature of capital flows to EMEs.Several commentators argued that the immediate post-crisis surge was largely a result of country-specific determinants—or domestic “pull” factors such as improved macroeconomic fundamentals, better institutional quality, and lower country risk in EMEs.But if so, the sharp reversal following the U.S. sovereign downgrade and rise in market risk-aversion is certainly puzzling—after all, the EMEs in question did not experience overnight a marked change in fundamentals.