Emerging markets have attracted nearly $4 trillion in cross-border portfolio inflows since the global financial crisis, increasingly driven by nonbank financial institutions, a shift that is expanding access to capital while exposing economies to sharper swings in global risk sentiment, the International Monetary Fund (IMF) said.
In its April 2026 Global Financial Stability Report, the IMF said investment funds, hedge funds, pension funds and insurers now dominate capital flows into developing economies, accounting for roughly 80% of portfolio debt holdings, up sharply over the past two decades.
The growing role of these investors has helped governments and companies tap international markets more cheaply and at longer maturities, supporting investment and financial market development. But the IMF warned the same flows are more volatile than traditional bank lending and can reverse quickly during periods of market stress, tightening financial conditions and amplifying economic shocks.
“Portfolio flows offer important opportunities but also carry risks, such as heightened sensitivity to shifts in global risk sentiment,” the Fund said.
Volatility Risk Intensifies
The IMF found that portfolio debt flows to emerging markets are now more sensitive to global financial conditions than bank lending, marking a structural shift in how global liquidity is transmitted. A rise in global risk, measured by volatility indicators, typically triggers a sharper pullback in investment fund flows than in bank credit.
Hedge funds and mutual funds were identified as the most “flighty” investors, retreating rapidly during episodes such as the 2013 taper tantrum, the Covid-19 shock and post-pandemic monetary tightening.
Countries with greater exposure to these investors face tighter borrowing conditions when sentiment deteriorates, including reduced debt issuance, wider bond spreads and currency depreciation.
Structural Vulnerabilities
The report highlighted several fault lines in the nonbank ecosystem. Open-ended investment funds, which offer daily liquidity while holding relatively illiquid assets, are vulnerable to sudden investor redemptions, potentially triggering fire sales.
The rise of passive funds and exchange-traded funds also adds to risks, as their benchmark-driven strategies can lead to synchronized selling across markets. Meanwhile, hedge funds’ use of leverage can amplify market stress through forced asset sales.
New sources of financing such as private credit and stablecoin flows are also expanding rapidly in emerging markets, creating additional channels for risk transmission, particularly in countries with weaker policy frameworks.
Impact on Growth and Financing
The IMF said reliance on risk-sensitive investors has tangible economic consequences. During periods of stress, sovereign and corporate borrowers that depend heavily on such investors issue significantly less debt and face sharply higher borrowing costs.
A higher share of these investors can lead to declines of up to 45% in corporate bond issuance during stress episodes, alongside widening spreads and reduced access to international markets.
While governments may partially offset the shock by borrowing domestically, firms often struggle to replace lost funding, forcing cuts to investment and weighing on economic activity.
Policy Response
To mitigate risks, the IMF urged emerging markets to strengthen macroeconomic fundamentals, build fiscal and foreign reserve buffers, and improve institutional quality to retain investor confidence during global shocks.
It also called for tighter oversight of nonbank financial intermediaries and greater international coordination to close regulatory gaps and improve transparency in cross-border exposures.
“Robust policy frameworks can mitigate the impact of adverse shocks,” the IMF said, noting that countries with stronger institutions and buffers tend to experience less severe capital outflows during periods of stress.
