Emerging markets: 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.

According to Anadolu Agency, in a blog published ahead of the IMF-World Bank Spring Meetings in Washington next week, the IMF noted that portfolio inflows to emerging markets have increased eightfold since the 2008 global financial crisis, with cumulative flows projected to approach $4 trillion by 2025. Most of this increase has been in the form of debt rather than bank lending.

The fund highlighted that portfolio debt liabilities in emerging markets now average about 15% of gross domestic product, up from 9% in 2006. Nonbank investors account for roughly 80% of this capital, a significant rise from the share seen two decades ago.

While this shift has improved access to financing and lowered borrowing costs, the fund warned that these flows tend to be more volatile than bank flows and are increasingly sensitive to changes in global risk sentiment. The risks associated with such volatility have been accentuated by recent geopolitical events, such as 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, correlates with portfolio debt outflows from emerging markets averaging about 1% of quarterly GDP. Hedge funds and mutual funds were identified as the most sensitive investors to global risk shocks, whereas pension funds and insurers were seen as more stable.

The fund further warned that the rapid growth of private credit in emerging economies presents additional risks due to limited transparency and data gaps, which make it challenging for authorities to detect vulnerabilities early. It urged policymakers to strengthen institutions, maintain adequate buffers, and closely monitor the composition of foreign investor bases.