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Increase of capital inflow into emerging markets

Recent surging capital inflow into emerging markets (EMs) are beneficial for those recipient countries in terms of promoting investment and economic growth, but also carry macroeconomic and financial stability risks, so a comprehensive approach to coping with capital flows is crucial, the International Monetary Fund (IMF) said on Tuesday.

Capital flows to EMs have rebounded with the ebbing of the global financial crisis, with Asian and Latin American EMs, South Africa and Turkey becoming top global capital recipients, the IMF said in a staff paper released on Tuesday prior to the Spring Meetings of the IMF and its sister agency World Bank that are scheduled to kick off later this month.

EMs recently are witnessing capital inflow spike, lifting asset prices and growth prospects. This trend can also bring a range of challenges including currency appreciation pressures, overheating, the buildup of financial fragilities and the risk of a sudden reversal of inflow, said the IMF.

The Washington-based agency held that developing countries’ improved fundamentals and growth prospects and easy monetary policies in advanced economies largely contributed to the recent wave of inflows.

“The recent surge in capital flows, amid ample global liquidity, has made it more important that we bring our members the best advice in this area, and that we do so consistently and in a manner that promotes the common good,” Dominique Strauss-Kahn, Managing Director of the IMF, said in a statement.

The paper reviews the experience of selected countries including Brazil, Indonesia, Peru and Thailand in dealing with capital inflows, and provides a possible framework for Fund policy advice on a range of measures available to policymakers to manage inflows, including macroeconomic policies, prudential measures and capital controls.

“Compared to other waves of inflows, the current episode is characterized by a predominance of volatile portfolio inflows. The shift towards portfolio flows could be structural in nature and imply continued volatility. Direct investment and cross-border bank lending are less predominant this time, reflecting lagging economic performance and impaired financial intermediation in advanced economies,” noted the paper.

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