US bank JP Morgan has warned that emerging economies like Nigeria may face a significant outflow of capital if former President Donald Trump’s ‘America First’ policies continue to gain traction.
This warning comes from a Reuters report citing a JP Morgan statement. Although Nigeria was not specifically mentioned in the report, the reference to emerging markets undoubtedly includes economies like Nigeria, which is one of Africa’s largest.
According to JP Morgan, emerging markets may be experiencing a dreaded “sudden stop” of capital flows. This phenomenon arises as Trump’s economic policies—such as tariffs and tax cuts—stimulate the U.S. economy, consequently pulling capital away from developing nations.
The investment bank revealed in its research note that $19 billion worth of “net capital outflows” had already been recorded from developing economies, excluding China, in the last quarter. An additional $10 billion in outflows is expected in the first quarter of 2025.
“Put simply, using the widely accepted academic definition, this would signal that EM ex-China is on the verge of a sudden stop,” the bank stated, cautioning that such an occurrence should not be underestimated.
What is a “sudden stop”?
A sudden stop in capital flows can starve emerging economies of the funds they need to grow—or, in some cases, to simply maintain stability. Analysts fear that without access to capital, these economies may face challenges ranging from slower economic growth to deeper financial crises.
JP Morgan noted that the current slowdown in capital flows is not being driven by an emerging markets-specific crisis. Instead, it is primarily linked to the global tightening of financial conditions, spurred by Trump’s economic policies.
These policies have raised the likelihood of U.S. interest rates staying higher for longer, making the U.S. a more attractive destination for investment capital.
“This is not a situation where specific EM countries are under pressure and are facing balance of payments or currency crises as was the case in 1998-2002, 2013, or 2015,” JP Morgan clarified.
“Rather, it is one of the strong U.S. economy and policy risks pulling flows out of EM.”
Additionally, the current environment is not driven by a weak U.S. economy triggering a global risk-off sentiment, but rather by a strong U.S. economy that is redirecting global capital flows.
What happens next?
How this situation unfolds will largely depend on Trump’s future policy decisions and key U.S. economic data, such as jobs, inflation, and retail sales. These factors could influence the Federal Reserve’s approach to interest rate adjustments, according to JP Morgan.
- Despite the risks, JP Morgan suggested that most emerging markets, including Nigeria, should be able to withstand the shock of a sudden stop in capital flows.
- However, countries such as Romania, Malaysia, South Africa, and Hungary were identified as being more vulnerable to these outflows.
- As Nigeria continues to navigate these global economic headwinds, its policymakers may need to brace for potential spillovers from the U.S. economy while taking steps to strengthen the local financial system.
- Nigeria attracted just $3.9 billion in total capital inflows in the first 9 months of 2024 and $5.3 billion in the whole of 2023. This compares to a total of $23.7 billion in 2019.
