Dow Jones - January 25, 2000
Capital Flows to Emerging Markets To Rise 30% as Confidence Rises
By ALAN YONAN JR. Dow Jones Newswires
WASHINGTON -- Private investors are expected to boost capital flows to emerging markets by about 30% this year as confidence in Asia and Latin America strengthens, the Institute of International Finance said.
The IIF predicted that net private capital flows to emerging markets would rise to about $190 billion after hovering just below $150 billion a year in 1999 and 1998.
"Private capital flows to emerging markets are coming back after having gone through such a difficult period," said Charles Dallara, managing director of the IIF, a global association of private financial institutions with more than 315 members.
Still, private capital flows remain substantially lower than the $327.9 billion reached in 1996 before a financial crisis hit Asia in mid-1997 and spread to Russia and Latin America the following year.
Mr. Dallara said he was encouraged by the composition of the capital flows, noting a significant improvement in the environment for lending and other debt financing.
Commercial banks, which pulled out $49 billion in 1998 and $39.1 billion in 1999, should slow their withdrawals to slightly more than $3 billion in 2000, the IIF said. Asset managers are expected to boost purchases of emerging-market debt to $42.7 billion this year, from $32 billion in 1999.
Equity investments are expected to drop off slightly in 2000 to $154 billion, but will remain well above crisis levels, the IIF forecast.
Portfolio investment is expected to rise to $33.7 billion, from $17.0 billion in 1999 and $13.7 billion in 1998. Foreign direct investment in plants and equipment, which proved much more durable during the crisis, is expected to fall to $119.8 billion from a record $138.8 billion in 1999.
While the overall picture for emerging markets is "improving," Mr. Dallara said, "there are uncertainties and there remain anxieties and there are risks."
For example, the U.S. could pose some problems if there were some combination of a dollar depreciation, continued growth of the current-account trade deficit, a rise in interest rates and a significant stock-market correction, he said.
In addition, emerging-market economies are vulnerable to political forces that could derail economic reform efforts, he said.
"Most emerging-market economies are reasonably well-positioned to continue to advance the process of sound policies and structural reforms. But this needs to be monitored carefully," he said.
The IIF forecast calls for net private capital flows to Latin America to increase to $89.6 billion in 2000, from $68.8 billion in 1999. Flows to emerging markets in Asia are forecast to rise to $59.4 billion from $39.3 billion. Emerging markets in Europe should expect flows to increase to $32.5 billion from $31.9 billion. Flows to Africa and the Middle East will rise to $11.6 billion from $8.7 billion, the IIF predicted.