The Collapse of Capital Flows to Emerging Markets: What are the Consequences?

Contribution

Kieler Beiträge zur Wirtschaftspolitik, 26: 41–48 Download

In the wake of the Covid-19 crisis, international capital flows to emerging markets saw an abrupt decline, or "sudden stop." Historical episodes of similar "sudden stops" of capital flows were followed by deep recessions, financial instability, and sovereign defaults in emerging markets.
Compared to earlier crises, however, the current collapse in capital flows is more severe in both size and speed. Emerging markets saw cumulative outflows by foreign investors of almost USD 100 billion over the course of three months. This constitutes a historically unprecedented "flight to safety."
The consequences of the ongoing collapse in capital flows are likely to be severe. Many emerging markets are currently entering a period of severe economic and financial turmoil. As emerging markets now account for a much larger share of global GDP compared to the 1990s or early 2000s and have become important trading partners for Europe and Germany, this will have important consequences for the global economy.
To address the mounting crisis, debt relief and large-scale financial assistance are warranted. Initial measures taken by the G20, such as the suspension of repayments on official debt, go into the right direction.