Is the emerging market scare already a thing of the past? Certainly the level of redemptions has abated from emerging markets equity funds that are tracked by data provider EPFR Global.
Last week investors redeemed $3bn, half the $6bn in each of the previous two weeks, while some even saw inflows. More importantly, the past month has not seen anything equivalent to the near-collapse of Long-Term Capital Management hedge fund, which followed Russia’s default in the emerging market panic of 1998.
The implication is that vulnerabilities in EMs have lessened with time. Bank lending to the developing world is less concentrated than in the 1980s and 1990s. Capital inflows have been more stable, increasingly in the form of foreign direct investment and portfolio capital rather than short-term bank finance. There has been less borrowing in foreign currencies and a bigger cushion of foreign exchange reserves, which means currencies have been able to take much of the strain where countries are heavily dependent on external finance.