The International Monetary Fund published research based on an analytical chapter of its latest Global Financial Stability Report examining emerging markets’ growing reliance on nonbank investors for external funding. It finds that expanded market-based finance can lower financing costs and support investment, but it also increases vulnerability to sudden capital-flow reversals when global risk sentiment deteriorates, with several emerging markets seeing outflows from nonresident nonbank investors in the context of the war in the Middle East. Since the global financial crisis, cumulative portfolio flows to emerging markets have increased eightfold to about USD 4 trillion, with most inflows in debt and portfolio debt liabilities averaging about 15% of gross domestic product, up from around 9% in 2006; nonbanks now provide 80% of this capital. Using a one-standard-deviation increase in the CBOE Volatility Index (VIX), the analysis associates a risk-off shock with portfolio debt outflows of about 1% of quarterly GDP on average, with investment fund outflows roughly twice as large and larger effects in countries with weaker fundamentals such as higher public debt, less adequate international reserve buffers, and weaker institutional quality. The research links volatility to redemption pressure and benchmark-driven strategies in investment funds, leverage and margin-related dynamics in hedge funds, and highlights fast-growing but opaque private credit in emerging markets, where assets under management are estimated to have risen fivefold over the past decade to USD 50 billion to USD 100 billion; it points to monitoring investor composition, maintaining fiscal and external buffers, and using monetary and exchange rate flexibility, foreign exchange intervention where appropriate, macroprudential tools, systemwide stress tests, and stronger international cooperation to address regulatory and data gaps.
International Monetary Fund 2026-04-07
International Monetary Fund research warns risk-sensitive nonbank investors now provide 80% of emerging market portfolio debt funding
The International Monetary Fund published research finding that emerging markets’ growing reliance on nonbank investors for external portfolio debt has lowered financing costs but increased vulnerability to risk-off shocks and sudden capital-flow reversals. A one-standard-deviation rise in the CBOE Volatility Index is linked to average portfolio debt outflows of about 1% of quarterly GDP, with larger effects where public debt is higher, reserves weaker, and institutions weaker. The paper highlights rapid but opaque private credit growth and urges closer monitoring of investor composition, stronger fiscal and external buffers, active use of policy tools, and better international cooperation to close regulatory and data gaps.