Emerging Economies Affect Global Financial Changes
The IMF analysis, part of the Global Financial Stability Report, finds that rising financial integration, more than emerging economies’ growing share of global GDP and trade, is the key factor behind their increasing financial impact on other countries. For example, while economic news from China does affect global equity returns, spillovers from Chinese asset price shocks remain limited relative to those of financially more integrated emerging market economies including Brazil, Mexico, and South Africa. Globally, the stocks of companies with more debt are also more likely to be hit by external shocks (see charts).
The role of financial integration and financial factors
The financial integration of emerging market economies into the global economy has affected international financial markets in both desirable ways—more efficient asset prices and resource allocation—and undesirable ones—amplification of shocks and transmission of excess financial volatility.
The IMF said two factors also reflect the importance of financial integration in driving the growth in financial spillovers from emerging markets. First, sectors that have higher debt levels and lower liquidity are subject to larger spillovers. Second, emerging market economies with larger financial institutions tend to emit larger spillovers. These emerging economies are also better able to absorb external financial shocks from other emerging markets.
The significant growth in global capital flows due to mutual fund investments is also affecting the nature and size of financial spillovers from emerging market economies. The decision by mutual funds to sell investments in multiple countries in response to losses in one or more countries, or because of withdrawals by their own investors, is called the portfolio channel of contagion. This channel has gained in importance as a source of financial spillovers from emerging market economies to equity markets in recent years, in line with the increase in asset allocation to these countries. The impact from the portfolio channel from advanced economies remains significantly larger, according to the IMF.
Financial spillovers from China will grow
The IMF research shows that among large emerging market...
To continue reading
Request your trial