FINANCE: Private Money Flees Developing Nations

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Sep 19 2002 (IPS) - Private capital flows to “emerging markets” will reach their lowest level in 10 years in 2002, dragged down by a global recession, security concerns and a possible U.S.-Iraq war, says a global association of financial firms.

Net private flows to emerging markets is expected to be 123 billion dollars this year, compared to an annual average of about 187 billion dollars over the past 10 years, according to the Institute of International Finance (IIF), which groups over 310 financial institutions from more than 60 countries.

The IIF forecasts that the largest single area of net private capital flows will remain foreign direct investment, although the 2002 total will be 20 billion dollars below last year’s level or 113 billion dollars.

“This difference has first gone into equity markets in the U.S. and Europe and now into the fixed income market in the U.S. and Europe. That’s largely where it’s gone. It’s just pulled back from the emerging markets because the risks were higher than the returns,” Charles Dallara, managing director of the IIF, told IPS.

In its capital flows report, released prior to the agency’s annual meeting next week, the association of investors said that as a share of emerging market Gross Domestic Product (GDP), net private capital flows this year are likely to equal just over two percent, compared to almost four percent of GDP in 1992.

Dallara, whose group lobbies on behalf of hundreds of international banks and investment houses, said the picture looks slightly better for next year, assuming global economic recovery. For 2002, net private flows could rise to about 151 billion dollars, predicts the IIF.

The increase would be largely due to the end of private capital outflows from crisis countries, particularly Latin America, rather than strong improvement in underlying emerging market fundamentals.

The report also said that a gradual economic recovery in industrial countries during the rest of this year, and possibly 2003, should help emerging market exports to recover from last year’s decline.

Argentina, Paraguay and Turkey have all been pestered by unrelenting financial crises during the year, and net development assistance to emerging markets is expected to reach record levels primarily due to official rescue packages extended to those countries.

The net flow of private money into emerging markets peaked at 328 billion dollars in 1996 before falling to 266 billion dollars in 1997. The Asian financial crisis began to unfold later that year, resulting in investment and lending plummeting to around 148 billion dollars in 1998.

The IIF, the financiers’ club, routinely surveys investment prospects in 29 “emerging markets”, a term invented by the World Bank’s IFC as a way to entice investors to venture into countries that otherwise would be shunned as “developing” or “Third World” markets – labels which connote high risk and political instability.

The IIF report noted significant regional differences, with net private capital flows to the emerging markets of Latin America forecast to fall to 29.1 billion dollars this year from 45.6 billion last year.

Private flows to the emerging markets of Africa-Middle East – countries like Egypt, South Africa and Morocco – are seen declining to 9.2 billion compared to 10.6 billion dollars in 2001.

But net private capital flows to the emerging markets of Europe – Bulgaria, Hungary, Poland and Romania, among others – are seen as rising to 23.9 billion this year versus 16.4 billion last year.

Flows to the emerging markets of Asia-Pacific – including India, China, Indonesia and Malaysia – are projected to increase to 60.7 billion from last year’s 53.4 billion.

Dallara said fear of contagion has led fund managers to tread more cautiously in emerging markets but that his association was working to minimise such risks in the future.

“The IIF will consider the formation of a task force comprised of emerging market investors, underwriters, traders, and key finance officials to review measures that would improve market mechanics and minimise contagion,” he said.

Dallara also urged more free-market economic reforms. “It’s not that the free market model has failed, it hasn’t been applied consistently enough,” he said.

“The emerging markets need consistency in their polices – sound fiscal and monetary policy – and to continue reform. When they waver, even for six or 12 months, the costs can be huge.”

Peter Woicke, chief of the International Finance Corporation (IFC), the private sector arm of the World Bank, told IPS that his organisation was aware of the risks facing emerging markets and has purposefully continued to lend to private companies, particularly exporters, in such markets.

“Our biggest concern is that commercial lenders do not want to go to the emerging markets, especially in Latin America,” Woicke said. “We are going into these countries in the hope that these banks would follow suit.”

The IFC said Wednesday its investments in emerging markets grew 14 percent in fiscal year 2002, to 3.1 billion dollars.

Earlier this week, the United Nations Conference on Trade and Development (UNCTAD) added its voice to a chorus of international concern over the flow of investments into the so-called emerging markets. It said that foreign direct investment was one of the main victims of the global slowdown.