What Happens in Emerging Markets If Recent Bank and Portfolio Inflows Reverse?

A substantial amount of foreign portfolio and bank-related capital has been flowing into a number of emerging market economies since 2009. A reversal of these flows as a consequence of financial deleveraging or waning risk appetite could place the financial sectors of many of those economies under substantial pressure. Research indicates that if these flows were to reverse, growth prospects would deteriorate and currencies would weaken vis-à-vis the U.S. dollar. Bank lending to the private sector would contract significantly, and the asset quality of banks' balance sheets would deteriorate