Citi: Capital Controls Coming Soon for Emerging Markets

Movement restrictions of people and goods could extend to capital in some emerging markets as they suffer from crippling outflows fuelled by the pandemic.

Most large emerging economies remain well-positioned to withstand the shock due to healthy account deficits and foreign reserves but the likelihood is increasing for others to implement capital controls, according to a note from Citi. While preventing any economic halt requires lower interest rates, this traditionally leads to capital flight which requires higher rates to reverse. 

«The only way to resolve this contradiction, in principle, is to close the capital account,» said David Lubin, the bank’s London-based head of emerging market economics.

«[And] there is some early evidence of an unprecedented collapse in global capital mobility which, if sustained, will make it tempting for countries to conserve their FX resources by imposing restrictions on capital outflows.»

Record EM Outflow

In March alone, numerous emerging market currencies such as the Brazilian real, Mexican peso and Russian ruble all weakened 10 percent against the dollar. And earlier this week, the IMF called on world leaders to pay particular attention to emerging markets, especially those facing debt distress, which recorded an all-time record-high $83 billion in outflows since the start of the crisis. 

«There’s a decent case to make that we might be approaching a world in which policymakers start to restrict the movement of capital in just the same way that they are restricting the movement of people and goods,» Lubin reiterated.