Mumbai, India. Borrowing costs for large emerging markets have risen this year. Photograph: Dhiraj Singh/BloombergForeign investors have pulled funds out of emerging markets for five straight months in the longest streak of withdrawals on record, highlighting how recession fears and rising interest rates are shaking developing economies.
Many low and middle-income developing countries are suffering from depreciating currencies and rising borrowing costs, driven by rate rises by the US Federal Reserve and fears of recession in big advanced economies. The US this week recorded its second consecutive quarterly output contraction. It marks a sharp reversal of sentiment from late 2021 and early 2022, when many investors expected emerging economies to recover strongly from the pandemic.
“The Fed’s position seems to be very different from that in previous cycles,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research. “It is more willing to risk a US recession and to risk destabilising financial markets in order to bring inflation down.” The reading suggests that activity in the country’s sprawling factory sector, a big growth engine for emerging markets more broadly, has fallen into contraction territory. The decline was because of “weak market demand and production cuts in energy-intensive industries”, according to Goldman Sachs economists.
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