EMEs adapt policy to shifting capital flows, global finance
Emerging market economies (EMEs) are navigating a rapidly evolving global financial landscape, marked by structural changes in capital flow dynamics and the growing role of non-bank financial institutions. This BIS paper highlights the need for resilient and adaptive policy frameworks to maintain external stability.
New currents in global capital
The global financial system has undergone significant structural changes since the Great Financial Crisis, particularly impacting EMEs.
Key developments include the growth of gross international investment positions, with some EMEs emerging as net creditors, and a notable shift towards greater reliance on local currency financing over foreign currency.
Furthermore, intraregional EME portfolio investments have expanded, alongside an increasing role for non-bank financial institutions (NBFIs) in both gross portfolio capital inflows and outflows.
These trends have contributed to EME resilience in recent years, allowing them to weather major shocks such as the Covid-19 pandemic, globally synchronized monetary policy tightening in 2022, and heightened trade uncertainty in 2025.
The composition and direction of capital flows to and from EMEs have changed, with gross inflows and outflows growing substantially across all EME regions.
Global factors still steer financial conditions
Despite increased resilience, financial conditions across EMEs remain highly synchronous, underscoring the persistent importance of global factors, especially changes in the US dollar's value.
In 2025, almost all EMEs benefited from accommodative global and domestic financial conditions, primarily due to a weak US dollar and cuts in EME policy rates, even amidst high economic and trade uncertainty.
This latitude to reduce rates without triggering capital outflows or currency weakening indicates strengthened policy frameworks in many EMEs.
The sensitivity of portfolio capital flows and local currency bond yields to US dollar strength has declined over recent years, contrasting with the capital outflows experienced during global financial tightening episodes in 2020 and 2022.
Adaptation is the new constant
The presented research underscores the persistent challenges for EMEs despite recent resilience.
While policy frameworks have strengthened, the diverse and often asymmetric nature of capital flows demands continuous adaptation.
This volume provides a crucial foundation for understanding these dynamics, yet practical implementation of tailored policies remains a complex task.