Summary
Following a surge in capital inflows during the last decade, flows to emerging markets (EMs) have since slowed considerably. Why? And will the falloff result in new debt crises in these countries? Ms. Zsoka Koczan, an economist in the IMF’s research department and coauthor of a recent IMF World Economic Outlook chapter on the topic, recently presented its findings at the JVI. Helene Schuberth from the OeNB served as discussant.

Anatomy of the Slowdown
The magnitude of the slowdown in net capital flows to EMs between 2010 and 2015, Ms. Koczan said, has been on the order of 5 percent of GDP. The decline has been broad-based: Inflows—net acquisitions of domestic assets by nonresidents—have dropped, and outflows—net purchases of foreign assets by EM residents—have risen. Moreover, all asset types and all regions of the world have been affected to at least some extent, which might suggest the existence of a “global financial cycle” that involves all counties.

Of further interest is that the slowdown has coincided with a halt in reserve accumulation by EMs, and even in some cases an outright decline, while EM exchange rates have depreciated against the dollar. Thus policies have responded, but are they helping?

What Is Different this Time Around?
Ms. Koczan then compared recent events with previous slowdown episodes. Citing the 1995 – 2000 slowdown as an example, she noted that although the magnitudes are similar, the outcomes have so far been quite different—which she attributed in no small part to better EM policies.

For example, previous slowdowns typically resulted in a large current account adjustment because countries were forced to compress their demand for imports. This time, the adjustment has been borne by international reserves, with the current account remaining fairly insulated from external developments. This time, the depreciation of EM exchange rates has been more orderly, that is more a reflection of immediate adjustment under sufficiently flexible exchange rate regimes than the delayed (and painful) adjustment that followed the collapse of fixed exchange rate regimes. This is also likely reflected in the lower number of crises observed so far.