Emerging markets face 'costly economic crises' with exit of capital, warns IMF

Emerging markets saw net capital outflows of US$1.1 trillion over the last five years, a warning sign that these countries could face new economic crises as their growth prospects worsen, a new IMF report said on Wednesday.

Emerging markets have seen the exit of capital equivalent to around 4.9 per cent of their combined GDP, IMF research show. That has been driven by reduced growth prospects, which have led investors to look elsewhere for returns.

Emerging markets could face “costly economic crises” as a result, the IMF said.

These countries account for a bigger share of the global economy than in the past, and are more fully integrated into global financial markets – meaning that an emerging market economic crisis would have big repercussions beyond its borders, the IMF said.

The Gulf has not been immune to these trends, the IMF data suggests. Saudi Arabia saw net capital flows fall by 10 per cent of GDP between 2010 and 2015, as part of a global investor move away from emerging markets with slowing growth rates, the IMF data show.

“All these countries are running current account deficits. So these countries need to attract capital from abroad,” said Jason Tuvey, emerging markets economist at Capital Economics. “If they’re struggling to do so, then countries need either tighter fiscal policy, which weighs on growth, or they will face problems financing their deficits.”

The IMF published its research ahead of its quarterly World Economic Outlook, in which it is due to update its forecast for global growth. The IMF will cut its headline estimates for global economic growth later this week, Christine Lagarde, the Fund’s managing director said on Tuesday.

China and Russia account for $675 billion of emerging market outflows, more than half of the total. Russia has been hit by US and European Union sanctions that have limited investment in the country, and made it harder for state-aligned companies and banks to do business abroad.

China’s stock market experienced a rout in June last year, followed by a second wave of declines at the beginning of 2016. China’s slowing economy, and worries that official data understate the size of the slowdown, have worried investors that the country will have difficulty transitioning from a manufacturing- to a services-led economy. The IMF estimates that China will grow 6.3 per cent this year – down from a peak of 14.2 per cent in 2007.

Global stock market prices are now increasingly dependent on fluctuations in China’s growth rate, the IMF said earlier this week.


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