The Covid-19 crisis triggered a sharp reversal of capital flows to Emerging Market Economies (EMEs). Also known as a sudden stop, this withdrawal of foreign funds can significantly damage economies. However, healthier growth prospects, unconventional monetary policy, expansionary fiscal policy, and large reserve buffers helped EMEs navigate the pandemic better than during previous sudden stops. A new BIS working paper suggests changing capital flow trends over the last decade may also have helped. In particular, the authors find:
The rise of EME investors and the growth of local currency bond markets have helped to diversify EMEs’ investor base.
EME banks have increased cross-border lending, and the share of EMEs’ liability represented by portfolio debt has risen steadily since 2008.
The frequency of bank-related capital flow surges into EMEs has fallen, and gross inflows into Advanced Economies (AEs) are now more volatile than to EMEs.
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