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Global Opportunity Index 2018: Emerging G20 Countries and Capital Flow Reversal

Attracting foreign investors into emerging market economies has been made more arduous by rising U.S. interest rates and heightened geopolitical risks. As their share of capital inflows grows, emerging market economies have also diversified the composition of these inflows away from foreign direct investment (FDI) toward bank and portfolio capital. However, portfolio flows are highly cyclical and 2018's drop in inflows reflects a reversal of the previous year's rise.

Investor appetite for emerging economies’ assets has weakened, but the underlying reasons for this change vary across countries. In this report, we use the Global Opportunity Index (GOI) to identify some of the idiosyncratic country characteristics that matter the most for emerging market economies to attract and retain investors in challenging times. 

We first gauge a country’s attractiveness to foreign investors by its GOI ranking. These two categories capture investors’ opinions on a country relative to expected international standards. Second, our analysis of international investor behavior shows that in mid-2018, investors tended to divert capital from countries with acute external financial vulnerability, worsening domestic political risk, and/or significant exposure to risks from protectionist trade policies. 

The 2008 financial crisis triggered the last comprehensive discussion on financial reforms—a crisis driven by financial activities in the United States and other advanced economies. Officially, 2019 is the final year for the implementation of Basel III, so it is also an appropriate time to make the necessary adjustments to the global, voluntary regulatory framework. We will focus our analysis on the following four priorities:

  • An adaptable and flexible global framework
  • The generalization of international standards and best practices
  • A stronger global data depository
  • Regulatory and monitoring cooperation

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