Introduction

Abstract

The role of capital flows and foreign exchange risks in emerging markets has been the subject of numerous studies in recent years. It is widely accepted that foreign investments can have a range of positive impacts on the economy of recipient countries. They are believed to stimulate trade and industry in the recipient countries as well as their financial development and overall employment and income level. To attract foreign investors many emerging economies have embarked on a range of liberalization and privatization programmes. These led initially to large inflows of capital and appeared to help economic growth. The repeated experiences of financial crisis in a number of emerging economies in the 1990s, however, alarmed both investors and host countries about the risks associated with such investments. The sudden outflows of capital in each case exerted acute pressure on the economy of the host country and adversely affected the stability of its foreign exchange market. The economic downturn and the uncertainties that were created in each case drove many investors out of emerging markets. The shortage of capital, on the other hand, compelled the authorities in many an emerging economy to adopt a number of new measures to regain the confidence of the investors, and attract them back.