Photo credit: www.investing.com

Concerns of Capital Flow Disruption in Emerging Markets

LONDON (Reuters) – Emerging markets may soon face a significant challenge due to potential “sudden stops” in capital flows, as the economic policies of the Trump administration prioritize U.S. interests. Investment bank JPMorgan has raised alarms over this scenario, indicating that the U.S. economy’s growth is leading to a diversion of capital away from developing nations.

The prospect of sudden stops in capital flows has raised concerns among analysts, as these events can deprive economies of crucial financial resources necessary for growth and stability. According to JPMorgan’s analysis, there has been a notable net capital outflow amounting to $19 billion from developing economies, excluding China, in the last quarter, with an additional $10 billion anticipated to leave in the first quarter of the upcoming year.

The bank highlighted that, based on widely recognized economic definitions, these figures suggest that emerging markets, outside of China, are approaching a critical point that could lead to a sudden stop—a situation deemed serious by the bank.

However, there are some mitigating factors to consider at this juncture. The recent slowdown in capital flows is not attributed to a crisis originating within emerging markets. Instead, it aligns with a tightening of global financial conditions, largely influenced by President Trump’s tariffs and tax reforms, which have resulted in expectations of prolonged higher interest rates in the United States.

As JPMorgan noted, this current trend does not reflect pressures unique to specific emerging economies facing balance of payments issues as seen in past crises (such as those in 1998-2002, 2013, and 2015). Rather, the situation stems from a robust U.S. economy and associated policy risks leading to capital withdrawals from these markets.

The future trajectory of this situation will largely hinge on new policy decisions from the Trump administration and forthcoming U.S. economic data, including statistics on employment, inflation, and retail sales, which could influence the Federal Reserve’s interest rate policies.

Should a sudden stop in capital flows occur, most emerging economies are expected to withstand the impact. Nevertheless, JPMorgan identified certain nations as particularly vulnerable, including Romania, Malaysia, South Africa, and Hungary.

Source
www.investing.com