In a highly globalized world, the behavior of another country may have a greater impact on a country than the behavior of the country. After the pandemic began, the “heavy artillery” of the major central banks from the crisis not only acted as the “firewall” of the rich countries, but also enabled the emerging countries to recover from the initial capital outflow in record time. But also, if the central banks of major powers shake their hands slightly and make a slight retreat, developing countries will also suffer heavy losses.
When the foundation is shaken, emerging economies are always the weakest layer in the world economic system. The pandemic “earthquake” is unprecedented: According to the International Finance Association (IIF), in March 2020 alone, debt and equity investments in emerging economies have flowed out as much as 100 billion US dollars. These investments, mainly from rich countries, flow away at an unprecedented rate.
However, after the investment came to an abrupt halt, the rate of return was also rapid. By June, the outflow of funds had ceased, and the amount of funds flowing into emerging markets was the same as that of outflows. Before the end of 2020, investment in emerging markets has returned to its pre-crisis level.
Compared with the fluctuations of previous financial crises, the current epidemic crisis has caused fundamental changes in the pattern of capital outflows and recovery in emerging markets. What are the reasons? IIF economist Jonathan Forton and Jose Perez Gorospe, head of emerging market research and analysis at Standard & Poor’s, an American risk assessment agency, both hinted that it was because the two world-class central banks, the Federal Reserve and the European Central Bank, made A radically different response from the previous one: Constantly relax liquidity and promise not to stop the accelerator prematurely. Debt interest rates in wealthy countries are at record lows-even if not directly negative, stock markets are at record highs, and both fixed income and stocks in developing countries are soaring, attracting investments that escaped at the beginning of the pandemic crisis Who turned around. Perez Gorospe emphasized: “For months, this is the only place where investors can get a return.”
Stimulated by the Fed’s extreme expansion measures, investment returned to developing countries in record time. However, a slight change in the direction of monetary policy may have fatal consequences. After the U.S. 10-year Treasury bond yield soared by 60%, the outflow of American capital ceased in February. For many people, this rate of return no longer has to bear the additional risk of investing in middle-income country bonds. Not only that, with the approval of Biden’s huge stimulus plan, more and more voices warned that overheating of the economy may bring inflation and force monetary policy to return to normal in advance. This may completely change the direction of investment.
Forton emphasized: “The debate on inflation alone will hurt investment in developing economies. Unlike a few months ago, some risks are beginning to emerge, and the liquidity frenzy in the market has slowed down a lot. But I think the Fed has learned from its past failures and will not make any more mistakes.”
Analysts believe that regardless of whether the makers of US monetary policy have learned a lesson, the Fed still has greater traction than the European Central Bank. At the same time, they believe that the path of differentiation has emerged from now on, and middle-income countries will no longer be regarded as a whole group, and their individual situations will receive “more attention.” In the face of interest rate hikes, not every country will be affected the same: countries with a more uneven balance of payments, such as Argentina or Turkey, will become cannon fodder; and those countries that have been mired in “significant fiscal challenges” since before the pandemic , Such as Brazil and South Africa, the same is true.
But Perez Gorospe believes that in almost all cases, “imbalances are much smaller than previous crises.” From South Africa to Indonesia, the market remains calm, because inflation will not spread thousands of miles away.
article links：U.S. inflation expectations endanger emerging markets
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