Emerging economies have been the most vulnerable to the economic shock of the COVID-19 pandemic but, in financial markets, investors have continued to bet in their favor. According to information from the International Institute of Finance (IIF), emerging markets attracted $ 17.9 billion in investments in financial instruments, such as debt bonds and stocks, in October, a monthly increase of 139%. Almost 4 billion of these investments went to Latin America.
“This year, capital flows will be relatively lower than last year, mainly attributable to the shock of the pandemic and the high uncertainty in the market. However, it is important to emphasize that we are surprised by the strength of fixed income flows, since we have seen significant issuance of sovereign debt in dollars for several emerging countries ”, says Jonathan Fortun, economist at the IIF, referring to the purchase of government bonds for part of foreign investors. In the Latin American region, says Fortun, the countries that saw the highest financial investments in October were Chile, Brazil and Colombia.
Many governments, including those of Mexico, Colombia and Peru, have issued government debt in dollars this year during the economic crisis from the coronavirus. The International Monetary Fund (IMF) has warned that emerging markets around the world have issued a total of $ 124 billion in sovereign debt this year alone, an amount that may prove unsustainable. The Spanish government has already appealed to the IMF itself as well as to the G-20 to open multilateral financing lines, as it fears the risk of an “unmanageable” debt crisis, according to an internal document that EL PAÍS had access to.
In recent months, the financial stimulus from the Federal Reserve in the United States and the interest rates set by the European Central Bank at the historical low of 0%, have led investment funds to seek alternatives with higher risk and better returns, as are investments in Latin America. Also, with advances in vaccines for Covid-19, the growth outlook of the global economy improved. This boosted investments in emerging markets in October, says the IIF.
Jonathan Fortun explains that “as we approach November 3, flows have decreased and in some places have even turned negative, which is usual in a context of high uncertainty due to the elections.” The economist assures that “” In the short term, the fundamental factor for capital flows will be the clarity of the results of the elections in the US, a factor even more important than which candidate will be chosen. If the results are clear and concise at the end of the vote, the IIF expects that the markets in general will see this as a sign of reduced uncertainty. Conversely, if the results are not clear and the winner is not known in the short term, uncertainty and the level of risk can rise, adds Fortun.