By Emad Mekay
WASHINGTON, Jan 15 2004 (IPS)

Private capital flows to so-called “emerging markets” rebounded strongly last year over 2002 levels, pulled up by low interest rates in rich countries and better economic policies in developing nations, says a global group of financial firms.

Net private capital flows to developing nations rose to 187 billion dollars in 2003 from 124 in 2002, and should reach 196 billion dollars in 2004, the Institute of International Finance (IIF), which represents more than 300 financial companies worldwide, said Thursday.

The 2003 flows are also the highest since the 1997 Asian financial crisis, when investors deserted those markets by the scores.

Private flows, aided by economic liberalisation and national deregulation, contribute substantially to the process of economic globalisation.

“The strong increase in flows to emerging markets in 2003 and the ensuing sharp narrowing of spreads reflect the low global interest rate environment and, to a degree, the improved policy performance in a number of emerging markets’ economies,” said IIF Chairman Josef Ackermann, who is also chairman of the group executive committee of Deutsche Bank AG, in a statement.

Spreads are generally the difference between income and the cost of an investment and between deposit and lending rates.

“It is important that today’s high level of flows to emerging market economies not lead to complacency,” said IIF First Vice Chairman William Rhodes, also senior vice chairman of Citigroup and chairman of Citibank, said in a statement.

The IIF, whose members include Bank of Montreal, Citigroup, VISA and Morgan Stanley, urged governments of those economies to continue what the group calls “sound macro-economic policies and structural adjustments”.

“On their part, investors need to remind themselves of the importance of differentiation among emerging market assets and practise sound risk management,” it said.

The IIF says its forecast assumes accelerating growth in Western Europe, North America and in many emerging market economies.

The group forecast 4.3 percent growth in gross domestic product (GDP) in the United States this year, with Western European economies gaining 1.7 percent and the UK and Canada rising by 3.5 and 3.3 percent, respectively.

Japan’s economic growth rate is predicted to slow to about 1.7 percent, while emerging markets will have overall growth of 5.3 percent in 2004, predicts the IIF.

The forecast for emerging market growth is more than one-half a percentage point higher than in 2003 and exceeds the average long-term rate by about one percentage point.

The report projected that Asia is likely to account for one-half of total net flows to emerging markets in 2004, with direct investment to the region amounting to around 60 billion dollars.

Asian countries included in the forecast are China, India, Indonesia, Malaysia, Philippines, South Korea and Thailand.

Emerging Europe’s share of total net private flows is expected to rise to 27 percent this year from 22 percent in 2003, reflecting a sizeable increase in flows to Turkey. Other countries in the group are Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia and Slovakia.

In Latin America, countries like Argentina, Chile, Mexico, Peru and Uruguay will see private flows – in the form of bonds, loans, equities and other securities – climb to 39 billion dollars, from 26 billion dollars in 2003.

Direct investment into Latin America is predicted to be 29 billion dollars, with Brazil, the region’s largest economy, accounting for nearly three-quarters of this volume.

Private flows to Africa and the Middle East will stabilise at less than three percent of total global flows.

According to the IIF, a main feature of the composition of capital flows to emerging markets in 2004 will be a revival in direct equity investment, rising from a seven-year low of 94 billion to nearly 111 billion.

But the group warned that higher than expected hikes to U.S. interest rates, unanticipated events in financial markets, a sudden slowdown in global growth or a worsening of credit worthiness in heavily indebted countries could all reduce private capital flows from the nearly 200 billion dollars it is projecting.

Excerpt: