IMF warns emerging markets face higher risk from nonbank capital

Emerging markets have become more vulnerable to global shocks as they rely increasingly on nonbank foreign capital such as hedge funds and investment funds, the International Monetary Fund said on Tuesday.

In a blog published ahead of the IMF-World Bank Spring Meetings in Washington next week, the IMF said portfolio inflows to emerging markets have increased eightfold since the 2008 global financial crisis, with cumulative flows approaching $4 trillion in 2025. Most of the increase has come in the form of debt rather than bank lending.

The fund said portfolio debt liabilities in emerging markets now average about 15% of gross domestic product, up from 9% in 2006, while nonbank investors account for roughly 80% of that capital, about double the share seen two decades ago.

While the shift has improved access to financing and lowered borrowing costs, the fund warned these flows tend to be more volatile than bank flows and are increasingly sensitive to changes in global risk sentiment.

It said those risks “have come to the fore in the context of the war in the Middle East,” which has already triggered capital flow reversals in some emerging markets.

According to the IMF, a one-standard-deviation rise in the CBOE Volatility Index, or VIX, is associated with portfolio debt outflows from emerging markets averaging about 1% of quarterly gross domestic product (GDP).

Hedge funds and mutual funds were identified as the most sensitive investors to global risk shocks, while pension funds and insurers were seen as more stable.

The fund also warned that the rapid growth of private credit in emerging economies poses added risks because of limited transparency and data gaps, making it harder for authorities to detect vulnerabilities early.

It urged policymakers to strengthen institutions, maintain adequate buffers, and closely monitor the composition of foreign investor bases.