With investors on edge following the recent weeks of turmoil in emerging markets, the release this week of updated capital inflow data by the Institute of International Finance could not have been better timed.
The trade group for global financial institutions, the Institute of International Finance is the most authoritative source on the long- and short-term cash that pours into these markets, and any sign that investors were fleeing en masse would suggest that more pain would be in store for many of them.
On the surface, the news did not seem bad at all.
For 2013, the trade group expects private sector inflows to fall just 1 percent; in 2014, a 3 percent retreat is predicted.
Given the $1 trillion that flows annually into these still maturing economies â€" about 3.5 percent of their total economic output â€" this hardly suggests a broader panic in the making.
A closer look at the data, however, reveals a trend that, if it continues, should be of grave concern to the fragile five club of countries â€" Turkey, Brazil, India, Indonesia and South Africa â€" that rely the most on foreign lenders to finance their growth ambitions.
Of all the categories that make up this $1 trillion figure, so-called nonbank lending to emerging market corporations, banks and governments has experienced the sharpest fall â€" 24 percent expected for 2013.
Broadly speaking, nonbank investors would include hedge funds, mutual funds, insurance companies and pension funds that invest in bonds around the world.
The institute expects these investors to extend $280 billion worth of credit to emerging markets this year, compared with $445 billion in 2012.
Bond investors are notoriously skittish, so it should not be surprising that that they should be at the forefront of an sell-off i emerging markets.
But there is a larger and, in the view of global regulators, worrying message that these figures also convey.
Since 2010, when the Federal Reserve’s bond buying program began to push United States interest rates to all-time lows, these global fixed-income investors â€" like BlackRock or Pimco or a hedge fund looking for a quick profit â€" have become the primary providers of credit to fast-growing banks and corporations in emerging markets.
And in the process, they have displaced commercial banks, which for most of the previous decade were the main lenders to these markets. But with regulatory pressure increasing, many large banks â€" European banks that have in the past been big creditors in these markets â€" have cut back their exposure sharply.
In 2012, for example, global bond investors lent almost half a trillion dollars to emerging market borrowers, compared with $118 billion for traditional lenders â€" by far the largest gap ever in favor of bond investors.
In a recent paper that has been widely circulated in the global regulatory community, Hyun Song Shin, a financial economist at Princetony and the incoming head of research at the Bank for International Settlements, the idea factory catering to global central banks, gave voice to this concern.
In particular, he warned of the risks that prevail when bond investors, who traditionally have a shorter-term approach compared with commercial lenders, pile into and out of the same markets at the same time.
“We have never seen anything like this before,†he said. “It is unprecedented and it is dangerous.â€
Mr. Shin also worries that regulators, in pushing hard for large banks to increase their cash reserves, are missing the larger issue: Aggressive borrowers in some of the larger emerging markets have been relying on fickle bond investors to fund their investments.
And when these bond investors pull out â€" as they have been doing in Turkey, Brazil, India and other such countries, according to this week’s data from the Institute of International Finance â€" the broader economic effect could be pronounced.
“It may not be an acute crisis,’ Mr. Shin said. “But it will be slow and simmering and the impact on global growth will be damaging.â€
