by Joseph Joyce
Among the most notable economic responses to the COVID-19 pandemic has been the turnaround in capital flows to emerging markets. A sudden reversal in portfolio flows of over $100 billion to these countries in March has been offset by a surge of capital this fall. But many of these countries have accumulated debt burdens that will affect their ability to recover from the pandemic.
The IMF examined portfolio flows to these economies in last April’s issue of the Global Financial Stability Report (see also here). The report showed that prior to the pandemic, bond portfolio inflows had been larger than equity portfolio flows, with cumulative flows since 2005 of approximately $2.5 trillion for bonds vs. about $1 trillion for equity. The bonds included both bonds denominated in foreign currency as well as local currency debt. These flows had constituted significant amounts of finance in the emerging and frontier markets’ debt and equity markets.
The authors of the report analyzed the determinants of the different types of portfolio flows. They reported that changes in global conditions (or “push factors”) are largely responsible for debt inflows. Among these factors are the VIX index, a measure of global risk appetite, the U.S. Treasury bond yield, and the foreign exchange value of the dollar. Equity flows are also influenced by foreign conditions, but domestic economic growth (a “pull” factor) is a larger factor in raising the likelihood of capital inflows. This reflects the dependency of the returns on portfolio equity on profitable business operations.