LONDON, Dec 2 (Reuters) - As a decade's worth of easy foreign money starts to ebb away from emerging economies, their governments are renewing efforts to deepen domestic savings pools - even if change is painfully slow.
The volatility prompted by signs of an eventual turn in U.S. monetary policy has not only underscored emerging markets' reliance on foreign capital, but also sounded a fresh warning: that without a significant home-grown investor base, countries risk a return to the old boom-bust cycles of the 20th century.
So in a world where Western central banks will no longer be pumping money and could even start raising interest rates, emerging economies must seek investment cash at home, preferably by boosting pension and insurance funds that provide a ready source of long-term capital.
More governments are taking this on board. Ewen Cameron Watt, chief investment strategist at the Blackrock Research Institute, says it was the crises of the 1990s that kicked off reforms in Mexico and Malaysia, both of which now have big domestic investor bases.
"Over the next decade the fastest growing pools of welfare savings will be in the developing world," Cameron Watt said. "These developments tend to get accelerated ...as a consequence of financial crises."
India, for instance, has launched an ambitious pension bill to route contributions to private funds on the lines of the U.S. 401(k) system, which allows retirement savings to be deducted from the employee's paycheck before taxation, often proportionately matched by the employer.
India has also loosened rules on foreign investment in the pension and insurance industries.
Turkey's government this year started making a 25 percent contribution to private pension premia. Nigeria plans to triple pension assets by 2020, while China has a pension overhaul on its policy map for the next decade.
Pension and insurance assets in developing countries have in fact been on the rise since the 2008 crisis. Assets stand now at $5.5 trillion, an all-time high and double pre-2008 levels, according to JPMorgan data.
But those savings are concentrated in a few big countries. They are also dwarved by the wealth of developed institutions: the entire stock of emerging pension assets still amounts to as little as a 10th of U.S. and Japanese holdings.
Still, the International Monetary Fund notes that market moves this year have differed from past episodes, in that waves of selling did not ravage all countries in the same way.
It attributes the differing responses not just to differing national balances of payments, but also to the presence or absence of resident investors who can offset foreign outflows.
As the diverging fortunes of the Johannesburg and Moscow stock markets show, domestic investors can mitigate if not eliminate the volatility caused by overseas capital.
With pension assets equating to over half of South Africa's annual economic output, its stock market has been fairly resilient to this year's volatility and has risen 14 percent so far this year.
Russian pension assets, on the other hand, amount to just 2 percent of GDP. So as foreign cash has drained out, Moscow-listed stocks have lost most of their early-year gains. .
Cameron Watt contrasts this year's oversized reaction in Indonesia's bond and currency markets with muted falls in regional peers Malaysia and South Korea.
"The deeper the financial system you can develop onshore, the more domestic buyers you have to cushion selling by non-residents," he said. "So the volatility of the won and ringitt has been less than in the rupiah, rupee and lira."
When foreign funds pull out, weakening the local currency, domestic investors often seize the chance to repatriate cash from overseas to buy beaten-down assets, noted Michael Power, global strategist at Investec.
In Mexico, for instance, pension funds known as afores have underpinned an equity sales boom this year despite volatile non-resident flows..
"In Mexico, Chile, Peru, which have relatively developed instutional investing bases, some of those guys are rubbing their hands with glee and saying 'at last value is starting to show'... they are waiting for foreigners to sell," he added.
If Latin America scores highly on pension reform, Russia and Indonesia are among the weak links. More worrying is the trend for cash-strapped governments to delve into pension pots, as has been the case in Argentina and Hungary.
More recently Russia sparked fears of pension nationalisation when it approved a measure that will give the government tighter control over private retirement savings.
It can also be hard to mop up and invest existing savings in countries where trust in institutions and companies is low.
India for instance has one of the world's highest savings rates at over 30 percent but most of the $800 billion pool is in gold or cash. Less than 5 percent of Indians own equities, directly or via mutual funds, while half of all Americans do.
So, while emerging investment funds slowly grow, a big chunk of their markets will be in foreign hands, causing them to "import volatility", said Amundi CIO Pascal Blanque.
"As long as the resident base of investors is not deep enough, you will see volatility in emerging markets coming from the adjustment of the global portfolios," Blanque said.
(Additional reporting by Natsuko Waki in London; Himank Sharma in Mumbai, Birsen Altayli in Istanbul and Tosin Suleyman in Johannesburg; Editing by Ruth Pitchford)