Run on emerging markets

Capital is flowing out of emerging economies amid fears over slowing growth and currency devaluations – mainly in China.

It’s like a run on the bank, except that in this case, it’s entire economies – namely, emerging markets – that are taking the hit.

This is not the first time in recent years that investors, corporations, financial institutions and others have moved their money out of emerging markets. But this time, the outflow is reaching a rare intensity, reports the Financial Times. When markets bottomed out during the three lowest quarters of the financial crisis, US$480 billion flowed out of the 19 largest emerging economies. In the 13 months that ended this past July, the total outflow reached almost twice that previous high: US$940.2 billion.

This is a massive reversal of the trend that saw emerging markets take in more than US$2 trillion in capital in the five years that followed the crisis.

There are many reasons for the current exodus. The main concern is that emerging markets have now stopped acting as the locomotives of the global economy – a role they have been playing since the financial crisis. Growth is slowing in many of these countries, foremost in China, and many currencies are weakening.

The recent devaluations of the Chinese renminbi and the expected rise in interest rates by the US Federal Reserve are adding fuel to the flight. And the end is nowhere in sight. “These outflows have much further to go,” said Maarten-Jan Bakkum, senior emerging market strategist at NN Investment Partners.