Put all this together, and you have a classic recipe for vulnerability. Capital inflows (borrowing overseas plus foreigners coming into the local stock market) tend to keep the exchange rate more appreciated than it would be otherwise. This encourages imports and discourages exports, so it is easy to develop a current account deficit (meaning that the country buys more goods and services from the rest of the world than it sells).
This is sustainable as long as the capital continues to flow in – particularly as long as companies can issue debt in dollars. But as John C. Bluedorn, Rupa Duttagupta, Jaime Guajardo and Petia Topalova of the I.M.F. point out in a new working paper, “Capital Flows Are Fickle: Anytime, Anywhere,” at least since 1980 “private capital flows are typically volatile for all countries, advanced or emerging, across all points in time.”
No one is immune from the fickle nature of credit in the world economy. International banks love countries until about five minutes before they start trashing them to clients – for example, because they feel (as now) that growth in China and other emerging markets is definitely slowing.
Shifts in sentiment are unavoidable. The question is: how leveraged are you when this happens and how much debt do you need to refinance while markets are feeling negative about your prospects?