Capital is cascading out of emerging markets as investors, companies and financial institutions lose confidence in developing countries. The outflows, which have risen towards $1tn over the past 13 months, hold a significance that extends well beyond the frailties of the countries themselves. The dynamism of developing nations helped restore the world to growth in the aftermath of the 2008-09 financial crisis. It is now dissipating fast.
Their vitality is being sapped by a vicious circle of cause and effect. Capital outflows add to pressures on emerging market currencies to weaken against the US dollar, thus inhibiting import demand, damping economic growth and spurring further outflows. If the cycle cannot be arrested, the risk is that a growth slump in developing countries — which account for 52 per cent of global gross domestic product in purchasing power parity terms — could pull the wider world into recession.
The resilience of emerging markets may be critical. But the prognosis is poor. To an extent, the growth model that generated rapid economic expansion over the past three decades appears to be broken. David Lubin, head of emerging market economics at Citi, says three key engines of GDP growth — exports, public domestic spending and private domestic spending — are all sputtering.
Exports are hobbled by a collapse in the growth of global trade. Public spending is weak because many countries are too nervous to loosen fiscal policy, fearing a loss of sovereign creditworthiness at a time when capital inflows are scarce. And private domestic spending is hampered by the fact that credit markets in many countries are in “post-boom” mode: neither domestic lenders nor borrowers have much appetite for risk, Mr Lubin adds.