Emerging Markets Show Resilience Despite Global Monetary Tightening

IMF Blog, July 12, 2024

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Interest rates in the United States are at 20-year highs and the dollar has appreciated sharply against other world currencies.
Despite historical precedents where rapid US monetary tightening and a strong dollar have led to sudden capital flight and financial crises in emerging markets, the latest evidence shows no emerging market crisis.
Emerging markets—excluding China—saw net capital inflows recover to $110 billion, or 0.6 percent of GDP, last year; this is the highest level since 2018.
Net portfolio inflows into emerging markets declined (consistent with global monetary tightening), while net inflows of foreign direct investment have been more stable.
China is an exception: it experienced net capital outflows, including negative net FDI inflows over 2022-23. Possible drivers include multinational firms repatriating earnings and shifting expectations about Chinese growth and geoeconomic fragmentation.

Patterns in net inflows mask a retrenchment of global gross capital flows: declines in both gross inflows (foreigners buying fewer assets) and gross outflows (residents buying fewer assets abroad).
In 2022-23, global gross inflows declined from 5.8 to 4.4 percent of world GDP, or from $4.5 trillion to $4.2 trillion, relative to 2017-19; global gross outflows declined in line with inflows.
The decline in gross flows masks large cross-country differences:
- The United States accounted for 41 percent of global gross inflows—almost double its 23 percent share in 2017-19.
- Gross outflows from the United States increased from 14 to 21 percent of global gross outflows.
- Global gross flows into and from China dropped considerably over that period.
- Financial centers experienced an even more drastic decline in gross flows; this may reflect increased financial fragmentation and/or an unwinding of some tax or regulatory strategies by large multinational corporations in financial centers.

The resilience of many emerging markets partly reflects stronger fundamentals: more robust fiscal, monetary, and financial policy frameworks, and more effective implementation of policies and tools.
Amid shrinking global flows, emerging markets should:
- Double down on recent improvements to macroeconomic frameworks.
- Strengthen policy implementation and institutions that helped them withstand higher-for-longer US interest rates.
Countries have a variety of tools to cope with stresses from capital flow volatility.
The IMF’s Integrated Policy Framework can help calibrate the best possible policy mix to navigate this strong-dollar period.

Emerging Markets Show Resilience Despite Global Monetary Tightening — Cian Allen, Rudolfs Bems; July 12, 2024 (IMF blog).