Emerging Markets Encounter Financial Challenges

Ever since the 2008 financial crisis, emerging markets have received less investment from other countries. This is due to falling demand for the commodities that have traditionally powered these countries' exports. In addition to this, flows to emerging markets decreased even further in 2014 due to unease in the markets. Now it is looking even grimmer. By the end of 2015, capital inflows to emerging markets are projected to reach $548 billion, while emerging markets are only expected to have about $540 billion in outflows. These numbers are troubling, for if the gap between capital inflows and outflows continues to decrease, net capital flows to emerging markets may go negative for the first time in decades. 

A major part of these woes stems from China's economic troubles this year. With the devaluation of the yuan, the country's economic slowdown, and decline in its manufacturing sector, China has caused instability in the rest of the emerging markets. If China decides to further devalue the yuan, net outflows from all emerging markets may increase substantially. Another country that emerging markets are dependent on is the United States, due to the recent debate over whether the Federal Reserve should raise interest rates. While the IMF has claimed that the Federal Reserve should refrain from raising rates because of the state of the global economy, the low rates are not necessarily good for emerging markets. Bankers in these countries are claiming that keeping interest rates low is causing potential investors to resist putting money into these countries. There are those who also argue that raising interest rates will return markets to stability if the process is done gradually. However, a sudden spike in interest rates would be damaging for all, especially for China.

Emerging markets are running low on funds, and if they keep spending more, their economies will remain in an unstable condition. Already, they are asking other countries and investors to help put money into their failing infrastructures. However, considering the economically weakened state of other major countries, the necessary restructuring may have to be taken up by the emerging markets themselves. Brazil has been making attempts to reduce overall outflows by increasing long-term investments and aiding in infrastructure improvements. Unfortunately, none of these have helped the country in a major way yet. For emerging markets, now it is a question of what occurs with interest rates and whether other nations will be willing to invest in them. Otherwise, these markets could be in store for difficult economic times.