Deeper Bond Markets Carry a Cost for Emerging-Markets Economies

International investors now control a big share of EM bond markets, leaving those economies more vulnerable to outside events.


The deepening of capital markets in emerging-markets economies over the past 15 years has fostered the growth of savings and investment and driven economic expansion. But as recent events have shown, this deepening has come at a cost: increased vulnerability to outside events. The Federal Reserve Board’s move to taper its bond purchases triggered a massive flight of capital that continues to affect many EM economies.

New data from the International Monetary Fund underscores those vulnerabilities. Foreign investor participation in local government bond markets has surged since 2009, topping 30 percent of the market in Hungary, Indonesia, Mexico and Poland, and 40 percent in Malaysia, and touching 60 percent in Peru. In most markets bond flows have greatly exceeded equity flows. That’s troubling, the IMF says, because evidence suggests that deeper equity markets boost economic resilience, whereas broader debt markets increase economic volatility. Yet there is a silver lining: Although portfolio flows have fluctuated, the IMF finds that foreign direct investment to emerging markets — money that stays put — has held steady.