Emerging market residents key to steady capital flows

Emerging markets can better resist capital flow volatility by taking measures to encourage their residents to invest abroad in good times and repatriate the funds when needed, according to a study by the International Monetary Fund (IMF).

Countries where a surge of capital inflows was offset by domestic residents' purchase of foreign assets fared better during the global financial crisis as international investors pulled out, the IMF said in a chapter of its World Economic Outlook, released on Monday. That showed policymakers had other options than capital controls or currency interventions, it said.

The fund's advice comes as countries from India to Indonesia brace for weaker capital flows once the US Federal Reserve phases out its monetary stimulus. The Fed's surprise decision last month not to pare its US$85 billion in monthly asset purchases for now gave them time to address domestic economic fragilities.

During the 2008 turmoil, "while some countries experienced the classical boom-and-bust cycle in response to volatile international capital flows, many did not", the IMF wrote in the study.

"Rather, as international capital flows dried up, domestic residents stepped in to replace them by drawing down their own foreign assets," it said.

The report focused on Chile, Malaysia and the Czech Republic, showing how they learned from past crises to adopt new policies that enabled what the report called "stabilising financial adjustment".