Global Financial Stability Report

Since the global financial crisis, emerging markets have received substantial cross-border portfolio flows, largely intermediated by nonbank financial institutions. Such flows bring opportunities but also challenges to emerging market economies, such as heightened sensitivity to shifts in global risk sentiment, especially for countries with preexisting vulnerabilities such as high debt, low international reserves, or weak institutional quality. Among nonbanks, the sensitivity to global risk varies significantly across investor types. Hedge funds, and investment funds react more strongly to shifts in global risk than other nonbanks, with passive mutual funds and exchange-traded funds showing the greatest sensitivity within the investment fund sector. Countries that tend to rely more on such risk-sensitive investors face tighter financial conditions during periods of global market stress, with adverse implications for macrofinancial stability.

To reduce volatility in cross-border portfolio flows, countries—especially those reliant on more risk-sensitive investors—should strengthen macroeconomic fundamentals and institutional quality, build robust fiscal and external buffers, and pursue proactive risk management consistent with the IMF’s Integrated Policy Framework. International cooperation is essential, to close regulatory gaps, limit the propagation of shocks, and close data gaps. The rapid expansion of private credit markets and stablecoins in emerging markets warrants continued, proportionate monitoring.