Cause for optimism on EM capital flows after awful period

It’s been a horrible period for emerging market portfolio debt flows. The better news is that broader capital flows to EMs have held up well and next year we expect a recovery in fixed income.

What you will learn:

• Capital flows amplify EMs’ economic and financial weaknesses. That’s why it’s encouraging that overall capital flows to emerging markets fell only modestly, to 2.5% of their GDP in 2022, which remains close to their mean over the past 30 years (of 2.7% of GDP).
• Recent cycles in capital flows to EMs have been shorter and shallower than the typical long, damaging waves since the 1970s. They’ve also been less correlated across categories of capital flows. In contrast to previous waves, banking and direct investment flows to emerging markets held up well during the tumultuous period in the global economy since 2019.
• Hugely elevated inflation uncertainty and debt sustainability concerns have wrecked short-term prospects for portfolio investment. But FDI and banking flows have remained supported by more positive long-term outlooks.