Capital Flows to Latin America: Recent Developments

According to ECLAC Washington Office s latest report Capital Flows to Latin America: Recent Developments, the external outlook for Latin American and Caribbean financial markets deteriorated significantly in the third quarter of 2011, as the euro-zone fiscal crisis and a frustratingly slow recovery in the U.S. weighed heavily on investor sentiment. Risk aversion rose significantly over the three-month period, leading to sharp volatility in the region's currency, equity and bond markets, underscoring the vulnerability of the region to shifts in market sentiment.

Although the more recent financial troubles afflicting the world economy are centered in the euro-zone, the impact on regional equity prices has been stronger than in the advanced economies. By the end of September 2011, the Morgan Stanley Capital International (MSCI) Latin American Equity Index had lost almost 28% since the beginning of the year, compared to a loss of 23% for emerging markets as a whole and 13% for the G7 countries. The speed and scope of the declines have served as a reminder that emerging markets, while bigger and more active than in the past, can still be prone to sudden outflows of capital.

The steep spike in volatility during the third quarter also led to a slowdown in Latin American debt issuance, reversing the strong momentum of the first half of the year. Access to international bond markets essentially closed for the region's high-yielding debtors towards the end of the quarter. Following the peak reached in May, debt issuance slowed in June, picked up pace in July and August, but slowed again in September. September 2011 was the slowest September since the global financial crisis in 2008, as uncertainty over the outcome of Europe's debt crisis left markets far too volatile for issuance