In 2025, developing economies are caught in a maelstrom of unpredictable capital movements. With global investment slowing and debt distress rising, policymakers and investors alike face an urgent question: how can these nations navigate second consecutive annual decline in productive flows to secure sustainable growth?

Global Trends: Numbers That Tell a Story

Recent data reveal stark shifts. Global Foreign Direct Investment (FDI) fell by 11% in 2025, marking a steep downturn in new capital commitments. Meanwhile, world output is forecast to decelerate to 2.3%, a rate often synonymous with recessionary pressures.

Over half of low-income countries—35 out of 68—are in or at high risk of debt distress, forcing tough choices between servicing loans and funding essential services. Although equity markets have retreated, developing-country risk premia remain relatively stable, masking deeper undercurrents in bond and bank flows.

This volatility is not uniform. While quarter-on-quarter equity inflows to developing markets have been milder than in advanced economies, volatile components like bank lending continue to swing wildly, exposing firms and governments to sudden funding shortages.

Drivers of Volatility: Push and Pull

Capital flows react to a complex interplay of external and domestic forces. On the external side, changes in major central banks’ interest rates and shifts in global risk appetite often trigger rapid outflows from emerging markets.

• Push factors: US rate hikes, monetary policy recalibrations in advanced economies.
• Pull factors: Domestic fiscal health, political stability, macroeconomic policy frameworks.
• Geopolitical tensions and supply chain shocks that heighten uncertainty.

These dynamics can amplify each other. A currency shock driven by outflows may erode public confidence, prompting further flight of capital and deepening financial instability.

Impact on Growth, Investment, and Debt

Volatility directly affects investment in critical sectors such as infrastructure, energy, and technology. With capital seeking perceived safety, long-term projects are delayed or abandoned, straining public finances and development plans.

Rising financing costs exacerbate existing vulnerabilities. Servicing foreign-denominated debt diverts resources away from health, education, and social protection. Countries already under pressure may see growth rates trimmed by 0.2 to 0.7 percentage points annually for years to come.

Policy Responses and Resilience Measures

To weather these storms, governments and corporations are adopting comprehensive strategies. At the macro level, strengthening macroeconomic fundamentals and credibility is paramount to reassure investors.

Corporate treasuries are also advancing risk management, integrating FX hedging, dynamic cash flow forecasting, and liquidity buffers to limit exposure.

• Building large domestic investor bases for more stable capital.
• Enhancing financial regulation and transparency.
• Regularly optimizing risk management and treasury operations.
• Developing local currency capital markets to reduce currency mismatch.

Regional and Multilateral Solutions

Beyond national actions, regional cooperation and international coordination can offer buffers. Developing local currency capital markets and expanding South-South trade are emerging as vital pillars of resilience.

• Regional integration to pool financing and share risk.
• South-South trade, now a third of global commerce, diversifies partners.
• Multilateral debt workouts and improved supervisory frameworks.

Institutions like the IMF are advocating for better policy surveillance and coordinated action to restore predictability in capital flows and protect vulnerable economies.

Outlook: From Volatility to Opportunity

If left unaddressed, persistent swings could sideline developing economies, not for lack of promise, but because capital gravitates toward safety. Yet, volatility also offers a catalyst for reform, pushing countries to bolster policies and diversify funding sources.

To transform these challenges into stepping stones, stakeholders must align public and private investment with development priorities. By channeling funds into infrastructure, technology, and social sectors, and by sustaining policy credibility, developing economies can harness global capital flows as engines of inclusive growth rather than victims of abrupt reversals.