Emerging Markets Fear "Sudden Stop" of Capital Inflows
Emerging markets (EMs) could see a feared "sudden stop" in capital flows as President Donald Trump's "America First" policies boost the US economy and suck money out of poorer nations, investment bank JPMorgan warned on Thursday.
Analysts fear sudden stops in capital flows because they deprive economies of the money they need to grow or even just keep going. According to JPMorgan's own data, there were net outflows of $19 billion from emerging economies in the past quarter, excluding China, and a further $10 billion is expected in the first quarter.
"In short, using the widely accepted academic definition, this would suggest that EM ex-China is on the cusp of a sudden stop," the bank said in a research note, adding that this was "not something to be taken lightly." For now, there are some caveats. The current slowdown in capital flows is not being driven by an EM-focused event, but rather by tightening global financial conditions as Trump's tariffs and tax-cutting promises increase the likelihood of US interest rates staying higher for longer.
Given this, "this is not a situation where specific EM countries are coming under pressure and facing balance of payments or currency pressures, as was the case in 1998-2002, 2013, 2015," JPMorgan added. Nor is it a case of a weak US economy driving a sell-off in risky assets worldwide.
"Instead, it is very much a case of a strong US economy and political risks sucking flows out of EMs," the analysts wrote. How things play out from here will depend on what Trump does and whether key US data on jobs, inflation and retail sales proves strong enough to influence the Fed's interest rate moves, JPMorgan said.
Even if there is a sudden stop in EMs, most economies should be able to absorb the hit. The countries most at risk are Romania, Malaysia, South Africa and Hungary, according to JPMorgan.