by Reinout De Bock, Dimitris Drakopoulos, Rohit Goel, Lucyna Gornicka, Evan Papageorgiou, Patrick Schneider and Can Sever
The COVID-19 pandemic caused an unprecedented sharp reversal of portfolio flows in emerging and frontier markets, triggering concerns about financial stability and consequently, strong policy responses. This column uses a novel analytical framework, the capital-flows-at-risk methodology, to show that changes in global financial conditions tend to influence portfolio flows more during surges and reversals than in normal times. Furthermore, stronger domestic fundamentals do not necessarily lead to surges in portfolio flows but help mitigate outflows. Hence, the weaker growth outlook for emerging markets due to COVID-19 will worsen local currency flows, while global financial conditions will affect hard currency flows.
Link: Managing volatile capital flows in emerging and frontier markets