Emerging markets risk 'overreliance' on MFs, BIS warns
That vulnerability has also been increased by the fact much of the money comes in through mutual funds and exchange-traded funds, the bank said in a report published Monday.
«These funds display a greater sensitivity to the dollar than other investors,» analysts Gaston Gelos, Pietro Patelli and Ilhyock Shim wrote. Developing countries should broaden their investor base to avoid an «overreliance on mutual funds.»
A stronger dollar reduces foreign investment in local currency assets through its «effects on investors' balance sheets and risk appetite, as well as on US dollar-return-chasing investors,» the report read. The sensitivity to the dollar has now overtaken interest rate differentials as a driver of local currency bond and equity flows.
In recent years, many emerging economies have developed their domestic bond markets, reducing reliance on loans in other currencies, the study said. That's helped bring financial stability to the countries, as well as attracting foreign investors to take advantage of double-digit returns, after countries such as Mexico and Brazil hiked interest rates early to tame the post-pandemic inflation wave.
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