Developing economies enjoying “remarkably favorable” financing conditions in recent months remain susceptible to changes in investor sentiment that could crimp capital inflows, a World Bank report said.
“Current market conditions are supportive to developing-country prospects in the short term, but could encourage investors to underprice risk and borrowers to increase leverage,” the Washington-based lender said in a report today. “This might set the ground for sudden spikes in volatility and sharp adjustments to adverse news.”
Since March, long-term interest rates and market volatility declined to “unusually low levels,” narrowing bond spreads and putting downward pressure on borrowing costs, the report said. This triggered “a renewed search for yields which supported the demand for developing-country assets and currencies,” according to the report.
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