economy
Hedge fund borrowing exposes emerging markets to greater Iran war risk, says IMF
Analysis shows developing economies more likely to experience higher interest rates and currency shocks
TL;DR
- Emerging economies are more vulnerable to interest rate hikes and currency shocks due to the Iran war, according to the IMF.
- Increased reliance on market investors, such as hedge funds and investment funds, presents a significant risk.
- These market-based funds are more likely to withdraw capital quickly during financial stress than traditional banks.
- Abrupt capital retrenchments can worsen financing pressures, increase borrowing costs, and cause sharp currency depreciations.
- Some emerging markets are already witnessing a reversal of capital flows from non-resident nonbank investors.
- Hedge funds and mutual funds show the highest propensity to withdraw investments during market volatility.
- Growing flows of stablecoins into emerging economies also pose risks due to their vulnerability to cryptocurrency market fluctuations.
- The opaque private credit sector's investments in emerging markets have grown significantly, raising concerns about transparency and financial stability.