By Guillermo Felices, Glenn Hoggarth and Vasileios Madouros of the Bank's International Finance Division.
Capital inflows into emerging market economies (EMEs) were at a record level in 2007 and higher than prior to the East Asian and Russian crises a decade earlier. These inflows largely reflect improvements in EMEs' economic and financial strength in recent years. But some EMEs, especially in Central and Eastern Europe, may be vulnerable to a reversal of capital flows if the global credit squeeze is prolonged or global GDP growth falls sharply. This could adversely affect both EMEs and foreign investors.
Capital inflows into EMEs since the millennium: risks and the potential impact of a reversal