Middle East war triggers fund withdrawals! IMF warns emerging markets face a new round of shocks

Ask AI · How does the Middle East war exacerbate the risk of capital outflows from emerging markets?

Cailian Press, April 8 (Editor: Niu Zhanlin) The International Monetary Fund (IMF) pointed out in a report that emerging market countries currently mainly obtain foreign capital financing through channels such as hedge funds, pension funds, and insurance companies, which makes them vulnerable to rapid capital outflows during crises.

The report shows that over the past 20 years, the proportion of funds flowing into emerging market debt from foreign securities investors has doubled to 80%. After the 2008 financial crisis, banks gradually reduced loans to emerging markets. Last year, about $4 trillion flowed into emerging markets outside the formal banking system, including funds from hedge funds and various investment funds.

In the “Global Financial Stability Report” released on Tuesday, the IMF stated that these sources of funds “largely benefit emerging markets,” because ample global liquidity allows these countries to issue debt financing over longer terms and at lower costs.

However, the IMF also warned that since 2008, foreign investors have become more cautious, and when the global financial environment changes, they are more likely to withdraw funds quickly.

The report points out that countries and enterprises relying on such sources of funds “are especially vulnerable to global financial shocks.”

The IMF also stated that hedge funds and investment funds are more sensitive to risk changes compared to other foreign investors; in emerging economies with shallower financial markets and limited policy regulation capacity, this risk is further amplified.

“A sudden withdrawal of funds could intensify external financing pressures, increase borrowing costs, and trigger sharp currency depreciation, thereby stressing the financial system and dragging down economic growth.”

The IMF warned that some countries are already experiencing these challenges: “With the outbreak of the Middle East war, these risks have surfaced, and several emerging markets are experiencing reversals in capital flows from non-resident non-bank investors.”

The IMF estimates that the external securities debt of emerging markets averages about 15% of GDP. Equity securities debt accounts for about 7% of GDP on average, but in some emerging markets, this proportion constitutes a significant part of market capitalization.

The report points out that holdings of foreign securities investors are especially large in certain currencies, such as the Hungarian forint. Last year, large inflows pushed the forint against the dollar up by about 20%.

However, since the outbreak of the Iran war at the end of February this year, the forint has weakened significantly; after more than a year of strong performance, inflows into emerging markets have declined.

The IMF also added that cross-border private credit and stablecoin inflows into emerging markets are also “growing rapidly,” with stablecoin flows closely related to cryptocurrency market trends.

To limit portfolio capital outflows, the IMF urges countries to improve institutional quality, establish better buffers (such as foreign exchange reserves), and ensure public debt sustainability.

IMF Managing Director Georgieva warned on Monday that due to the Middle East conflict, all roads lead to higher prices and slower growth. She added, “Even if the war stops today, the negative impacts on other parts of the world will persist.”

(Cailian Press, Niu Zhanlin)