Emerging Markets Face Potential Capital Outflows

By Marc Jones

LONDON (Reuters) – Emerging markets could be experiencing a feared “sudden stop” of capital flows as President Donald Trump’s ‘America First’ policies bolster the U.S. economy and draw investments away from poorer nations, warned investment bank JPMorgan on Thursday.

Concerns Over ‘Sudden Stops’

Analysts are concerned about sudden stops in capital flows since they hinder economies from accessing the funds necessary for growth or even basic operations.

JPMorgan’s internal data indicates that there were $19 billion worth of “net capital outflows” from developing economies, excluding China, in the last quarter, with an additional $10 billion anticipated to leave in the first quarter.

“Put simply, using the widely accepted academic definition, this would signal that EM ex China is on the verge of a sudden stop,” the bank stated in a research note, emphasizing the seriousness of the situation.

Caveats to Consider

However, there are some mitigating factors for the moment. The current decline in capital flows is not attributed to an emerging markets-specific incident, but rather due to the tightening of global financial conditions. Trump’s tariffs and proposed tax cuts raise the prospect of prolonged higher U.S. interest rates.

In this context, JPMorgan remarked that this isn’t a situation where specific emerging market countries are under acute pressure leading to balance of payments or currency crises, as witnessed in 1998-2002, 2013, and 2015.

Furthermore, it isn’t a weak U.S. economy initiating a global sell-off, but a robust U.S. economy and associated policy risks diverting investments from emerging markets, analysts wrote.

Future Implications

The outcome of this situation relies heavily on Trump’s actions and whether pivotal U.S. economic indicators—such as jobs, inflation, and retail sales—prove sufficiently strong to influence the Federal Reserve’s interest rate policies, according to JPMorgan.

Even if a sudden stop ensues in emerging markets, most economies are expected to withstand that shock. The most vulnerable countries identified by JPMorgan include Romania, Malaysia, South Africa, and Hungary.