New-breed global investors and emerging-market financial stability
Gaston Gelos, Hiroko Oura 23 August 2014
The landscape of portfolio investment in emerging markets has evolved considerably over the past 15 years. Financial markets have deepened and become more internationally integrated. The mix of global investors has also changed, with more money intermediated by mutual funds. This column explains that these changes have made capital flows and asset prices in these economies more sensitive to global financial shocks. However, broad-based financial deepening and improved institutions can enhance the resilience of emerging-market economies.
The investor base matters since different investors behave differently. During the emerging-market sell-off episodes in 2013 and early 2014:
- Retail-oriented mutual funds withdrew aggressively, but investors from different regions also tended to behave differently;
- Institutional investors such as pension funds and insurance companies with long-term strategies broadly maintained their emerging-market investments.
Figure 1 shows the facts.
Figure 1. Bond flows to emerging-market economies
Financial markets International finance
Pension Funds, financial stability, capital flows, investment, emerging markets, financial deepening, herding, original sin, mutual funds, institutional investors
The credit cycle and vulnerabilities in emerging economies: the case of Latin America
Julián Caballero, Ugo Panizza, Andrew Powell 02 April 2014
In recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. This column argues that these phenomena are linked, and may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess. There is no systematic information on firms’ currency mismatches and hedging activities, and none that includes those of subsidiaries that may be located in other jurisdictions, preventing an accurate analysis of the true risks.
Over recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. These phenomena are linked, and in Caballero et al. (2014), we argue that they may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess.
Exchange rates Financial markets International finance
exchange rates, Latin America, carry trade, credit conditions, original sin
Redemption or abstinence?
Ricardo Hausmann, Ugo Panizza 21 February 2010
Is “original sin”, a situation in which the domestic currency is not used to borrow abroad or to borrow long-term even domestically, no longer a problem? This column argues that, while original sin has diminished and countries are making greater use of their domestic bond market, foreign currency debt is still too risky to be sensible.
The emerging market crises of the 1990s focused the attention of economists on issues of debt composition and particularly currency denomination (Krugman 1999). A debate emerged in the late 1990s regarding the causes of the prevalence of foreign currency foreign debt in emerging markets. Some saw it as a consequence of moral hazard.
emerging markets, Currency crises, original sin