Emerging markets today face a world of faster shocks, tighter capital flows, and unpredictable risk appetites. In this environment, a recent IMF study argues that stronger policies and deeper domestic markets offer a more durable buffer than luck alone. While external conditions have helped, the real story lies in better frameworks.
From Vulnerability to Resilience
Historically, emerging economies have been particularly volatile during “risk‑off” episodes, moments when global investors pull back from riskier assets. That often triggered capital flight, currency collapses, spikes in borrowing costs, and deep recessions. Yet in recent cycles, many such economies have shown greater resilience. They manage smaller output contractions, contain inflationary pressures better, and suffer less from severe capital flow reversals.
The IMF quantifies the gains: improvements in policy frameworks since the global financial crisis have contributed an additional 0.5 percentage point of growth and reduced inflation by 0.6 percentage point during recent shocks. For context, favorable external conditions also added about 0.5 point to growth, but without lowering inflation. Thus, the IMF stresses that “good policies matter” just as much as, even more than, “good luck”.
Policy Ingredients That Matter
Which policy levers have proven most effective? First, central banks in many emerging economies have progressed toward credible inflation targeting, resisting pressures to blur lines between fiscal and monetary policy. That credibility helps anchor expectations, reducing the need for disruptive interventions in currency markets. Second, fiscal rules and more countercyclical budgets have constrained procyclical spending swings and preserved buffer space. Third, deeper capital markets, especially domestic local‑currency debt markets, have improved liquidity and reduced reliance on fickle foreign capital. That reduces currency mismatches and lowers systemic fragility.
The IMF cautions, however, that not all emerging markets are alike. Frontier or smaller economies still struggle to attract diverse investor bases, remain dependent on banks to absorb debt issuance, and face more abrupt “sudden stop” risk when capital dries up. In those settings, weak frameworks magnify vulnerabilities.
Implications for Policy and Investors
First, reforms must continue. Even for economies that have made progress, external shocks may worsen suddenly. The world’s interest rate dynamics, geopolitical shifts, or commodity price swings can sap buffers. Stronger policy frameworks allow more flexibility and room to maneuver.
Second, deepening capital markets remains essential. More liquid, transparent, and diversified debt markets reduce dependence on foreign creditors and help governments finance through stress periods. Reforming debt management institutions, improving issuance scheduling, and enhancing investor disclosure are critical complements.
Third, incremental improvements in policy credibility pay off. Even if a country cannot instantly match the frameworks of advanced economies, gradual strengthening of central bank independence, inflation frameworks, fiscal rules, and institutional capacity can shift the risk profile substantially.
For investors, this suggests more differentiated credit and sovereign risk assessments. Emerging markets with strong frameworks now deserve narrower spreads and greater access, while weaker economies must be priced for volatility and potential sudden stops.
In short, the IMF’s analysis challenges a fatalistic view that emerging markets are perpetually exposed. Yes, global shocks remain real. But resilience is not random. With better policies and deeper markets, even underdog economies can tilt the odds in their favor.
A Final Note
The evolving story of emerging markets is no longer one of default fragility. As the IMF’s analysis makes clear, sound policy and deeper domestic markets are shifting the balance. Resilience is increasingly earned, not inherited. For policymakers, the message is clear: credible institutions and financial depth are not just technical goals, they are strategic defenses. And for investors, the takeaway is equally sharp, look beyond headlines and focus on fundamentals.
