“Are We Prepared to Impose Temporary Debt Standstills?”
In a remarkable turnaround, foreign investors are estimated to have pumped over $35 billion into emerging market (EM) stocks and bonds in March, the highest monthly inflow in nearly two years, according to the Institute of International Finance. One of the biggest beneficiaries is Latin America, which for months had been shunned by investors. The region took in $13.4 billion, with equities in even crisis-hit Brazil receiving over $2 billion.
But is this the beginning of an enduring rally or is this “hot money,” which can change direction without notice, about to get cold feet again?
“Over the past 15 years there has been a very large increase in the presence of foreigners in domestic equity, bond and deposit markets of developing countries,” says Dr. Yilmaz Akyuz, the chief economist of the South Centre, an intergovernmental organization of developing and emerging economies representing 52 countries, including four of the BRICS nations (Russia excluded). Akyuz was speaking at a briefing of delegates at the UN’s Geneva headquarters.
This influx of foreign funds may seem like a blessing until the tide suddenly turns. Then it becomes a curse.
“Your reserves may be adequate to service your short-term debt but if there is a massive exit from domestic bond, equity, and deposit markets then your reserves will not be enough,” Akyuz warns. There’s a simple reason for this: a large chunk of emerging markets’ reserves is derived from the initial entry of hot money into their economy.
Last year, investors pulled $6 billion out of emerging market funds managed by Pimco, according to the New York Times. A debt fund run by MFS investment management in Boston lost $1.4 billion, and Trust Company of the West in Los Angeles suffered outflows of $1.8 billion from its $2.6 billion bond offering last year.
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