By IPS Correspondents
WASHINGTON, May 7 1998 (IPS)

Private investment in 29 major emerging markets has held up – despite Asia’s financial troubles – although confidence remains tentative, according to a leading global association of finance companies.

Projections for private investment “suggest that equity investments will reach a record volume and they could account for two-thirds of total net private capital flows to the emerging markets,’ Georges Blum, chairman of the Washington-based Institute of International Finance (IIF), said in a statement Wednesday.

The IIF, in a report released in Washington and Rome, predicted that net private capital flows to the major emerging markets of Asia, Latin America, Europe, and Africa will reach 221 billion dollars this year. That would be only slightly below its estimate of 233 billion dollars for 1997 but considerably lower than the 1996 level of 304 billion dollars.

It warned, however, that investors’ “current view of an eventual recovery in Asia is dependent on governments’ implementing tough macroeconomic measures and far-reaching structural reforms, which they have so far embraced with varying degrees of reluctance.”

International bail-outs led by the International Monetary Fund (IMF) likely will bring “very sharp contractions in economic activity in most of the Asian countries,” the IIF said in its latest report on ‘Capital Flows to Emerging Market Economies’.

Deflationary pressures in the IMF-backed programmes may not have been fully taken into account by investors and “will involve considerable hardship for the populations”, the report said. “This raises questions about the political sustainability of adjustment programmes, particularly in the face of the potential for social unrest, which is high in some countries.”

Institute members also expressed fear that “stagnation in the Japanese economy and the risk of a deflationary spiral there also pose a threat…(and) could have a significant impact on the region.”

Investors who lost on their Asian gambles last year undertook a massive ‘flight to quality’ – meaning they invested in relatively safe U.S. stocks – and thereby helped drive down long-term interest rates since the last quarter of 1997.

Continued low interest rates in the United States and the convergence of rates in Europe ahead of European Monetary Union – coupled with falling yields on Japanese government bonds – “may again lead to an increased willingness of investors to hold emerging market assets as part of a ‘quest for yield’.”

The five countries at the centre of Asia’s economic woes – Indonesia, Malaysia, the Philippines, South Korea, and Thailand – likely will see zero net private capital flows this year, the IIF predicted. That is because the reversal of short-term foreign bank lending will be offset as foreign investors take advantage of new bond issues and opportunities to increase their ownership of Asian assets.

Economic output will fall by nearly six percent for the group as a whole. Indonesia would fare worst, with output expected to decline by 12.5 percent this year. Output would fall seven percent in Thailand, five percent in Korea, and two percent in Malaysia. Strong exports and an active programme to replenish reserve by issuing bonds and borrowing from the IMF actually could contribute to a rise of two percent in the Philippines.

Private investors bet on the five countries to the tune of 97 billion dollars in 1996, much of it in short-term bank lending. But last year the countries haemorrhaged a net 12 billion dollars to overseas investors as banks called those loans, simulateneously reacting and adding to disarray in the region’s financial markets.

“Outside Asia, private capital flows are projected to fall only slightly to 167 billion dollars in 1998 from 172 billion dollars in 1997,” the report said.

Portfolio equity flows – mostly made up of short-term holdings by mutual funds and institutional investors – appeared to have taken the Asian crisis in stride. The IIF expected these flows to rise to about 35 billion dollars this year from 25 billion dollars in 1997.

In contrast, foreign direct investment (FDI), a measure of long- term financing for new factories and other physical plant, will “moderate slightly, due mainly to lower foreign direct investment in China, which is expected to fall to 37 billion dollars from 43 billion dollars.” Prospects that worldwide FDI would hold at around 70 billion dollars hinged on large-scale sales of state- owned entities in Brazil.

The Institute saw “substantial current account surplus” – in which earnings from exports exceed the costs of imports – for Asian economies this year, reversing previous years’ deficits. In contrast, Latin America’s current account deficits would widen from 58 billion dollars in 1997 to 77 billion dollars this year.

“Although the Brazilian deficit is projected to stabilise at about four percent of Gross Domestic Product (GDP), the Mexican and Argentine deficits are expected to widen as exports suffer from increased competition from Asia and a slowdown in global demand growth, particularly in Asia,” the report said. Export earnings also would be hit by weaker prices for oil and other commodities.

‘Major emerging market economies’ covered by the IIF were, in Asia: China, India, Indonesia, Malaysia, Philippines, South Korea, and Thailand. In Latin America: Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and Venezuela. In Europe: Bulgaria, Czech Republic, Hungary, Poland, Romania, Russian Federation, Slovakia, and Turkey. In Africa and the Middle East: Algeria, Egypt, Morocco, South Africa, and Tunisia.

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