Author: Marc Jones
LONDON (Reuters) – Emerging markets could experience a frightening “sudden halt” in capital flows as President Donald Trump’s “America First” policy pumps up the U.S. economy and siphons money from poorer countries, investment bank JPMorgan warned on Thursday.
Analysts fear a sudden halt to capital flows because they deprive economies of the money they need to grow or even just keep going.
JPMorgan’s internal indicators show there were $19 billion worth of “net capital outflows” from emerging economies, excluding China, in the latest quarter, with another $10 billion expected to flee in the first quarter.
“Simply put, using the widely accepted academic definition, this would signal that EM ex-China is on the verge of a sudden stop,” the bank said in a research note, adding that the phenomenon was not something “to be taken lightly.”
For now, there are some caveats.
The current slowdown in capital flows is not driven by an EM-centric event, but by tightening financial conditions globally as Trump’s tariffs and tax cut promises raise the possibility that US interest rates will remain higher for longer.
With that in mind, “this is not a situation where certain EM countries are under pressure and facing balance of payments or currency pressures as was the case in 1998-2002, 2013, 2015,” JPMorgan added.
Nor was it a case of a weak US economy leading to a “risky” sell-off around the world. “It is one of the strong US economy and policy risk of withdrawal of EM flows,” the analysts wrote.
How the situation develops will depend on what Trump does and whether key US data on employment, inflation and retail sales prove strong enough to influence the Fed’s interest rate changes, JPMorgan said.
Even if a sudden slowdown occurs in EM, most economies should be able to absorb that shock. JPMorgan said Romania, Malaysia, South Africa and Hungary are most at risk.
