Capital Flows to Latin America and the Caribbean: Recent Developments

Continued global monetary easing in face of a deteriorating economic growth outlook helped to bring new capital inflows to Latin American and Caribbean (LAC) markets in the first half of the year, as international investors searched for higher yields. LAC credit assets denominated in hard currencies, particularly in U.S. dollars, benefited as a result. According to JPMorgan, inflows into emerging markets (EM) dedicated funds are running well ahead of last year’s pace, with preference for hard currency assets relative to EM local markets accounting for 80% of these inflows year-to-date. U.S.-denominated credit assets have benefited from low U.S. interest rates, with current 10-year Treasury yields at record lows.

Investor sentiment deteriorated in the second quarter of 2012, however. Although early in the year investor sentiment improved significantly following the announcement of the European Central Bank's Long-Term Refinancing Operation (LTRO) in December 2011 and better-than-expected data releases for the U.S. economy in the first two months of the year, by the middle of May doubts about the euro area growth and financial health had returned. Combined with a series of disappointing data releases for the U.S. economy, these doubts drove up market volatility and made investors more cautious.