A growth-crushing downward spiral looks imminent for emerging markets, threatening to turn back the tide of foreign investment that flooded into developing countries on the premise of fast economic expansion.
Countries in Asia, Latin America and emerging Europe are being forced to raise interest rates sharply to stave off currency collapses and a wholesale exodus of foreign investors. Turkey, India and South Africa jacked up rates this week, heaping pressure on others to follow suit.
Whether these steps will steady the currencies is unclear, but one thing is sure - economic growth, developing countries' main trump card over their richer peers, will take a hit.
Analysts reckon Turkey's dramatic 425 basis point rate hike could almost halve this year's growth rate, to 1.7-1.9 percent, for example, while the South African Reserve Bank, which raised by half a point, cut its estimates for 2014 and 2015 growth.
Indonesia's economy last year probably grew at its slowest pace in four years, below its long-term average of above 6 percent, after 175 bps in policy tightening since June.
Even before the latest increases in borrowing costs, developing country growth rates were under the cosh.
Not only was the developing world's 4.7 percent growth last year almost a full percentage point under International Monetary Fund forecasts, its premium over growth rates in advanced countries has shrunk to its lowest in a decade.
In Brazil and Russia, growth is running below the levels forecast for Britain and the United States in 2014.
That is very bad news for the investment outlook, going by the findings of a recent IMF study that examined capital flows for 150 countries between 1980 and 2011.
Net capital flows to emerging economies, estimated at as much as $7 trillion since 2005, have tended to be highest during periods when their growth differential over developed economies is high, the paper found.
And investment flow is also "mildly pro-cyclical" with domestic growth rates, the paper said, meaning that as developing economies expand, they draw more investment.
"Investors are getting what they asked central banks for - higher interest rates. But there is no denying that there is a massive headwind to capital flows into emerging markets," said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch.
"Historically the two main drivers of capital flows to EM (are) the difference between EM-DM growth... (and) real U.S. interest rates which are starting to go up."
Higher interest rates raise