Capital Inflows to Emerging Markets

Private capital inflows to emerging markets are set to soar by two thirds this year as countries like Brazil and China drive global recovery, the Institute of International Finance (IIF) said today.

Emerging markets seemed to be aware of risks from hot money — short-term, yield-chasing cash inflows, the global banking association said. Mature economies need to come up with credible plans to tackle spiralling debt and liquidity, it said.

“We face a situation that in my more than 50 years in banking is without precedent,” said William Rhodes, First Vice Chairman of the IIF’s Board said at a media conference in Zurich on the eve of the World Economic Forum meeting in Davos.

“We are seeing rising levels of private capital flows moving into emerging market economies not only because these are demonstrably good places to invest in, but also because their growth prospects look decidedly more favourable than the rather meagre ones of the mature economies,” he said.

The IIF is an association of financial services firms with over 380 members worldwide. Rhodes, who is also senior vice chairman at Citigroup, said hot money flows, as well as rising inflationary pressures, were posing a tough challenge to governments and central banks in some emerging countries.

The IIF noted a significant risk of renewed excesses, which needed to be monitored by investors and policymakers, though Rhodes struck a note of confidence: “I believe that there is an acute sensitivity to this in key capitals.”

Central bankers have also warned that huge capital flows into emerging market assets may create new bubbles and add fresh instability to the global financial system.

G20 ACTION Rhodes said the global economy was on the mend but risks remained. “The global economy and its financial system are out of the emergency ward,” he said. “However, they are still far from being in sound health.”

The global economy should grow by 3.2 per cent in 2010 after a drop in global output of 2.5 per cent in 2009, the IIF said.

Mature economies are set to grow by 2.4 per cent, emerging markets should see growth of 6.1 per cent this year.

Net capital inflows to emerging markets were set to rise to US$722 billion from an estimated US$435 billion in 2009 driven by a rebound of direct investment and commercial bank lending , the IIF said.

IIF chairman Rhodes urged the Group of 20 developed and emerging nations to take joint action to secure the recovery and long-term growth prospects.

The G20 had to roll back protectionist measures in trade and finance such as unilateral regulatory reforms or special taxes, which could damage the financial system, he said.

Governments in mature economies, in particular, needed a clear strategy to bring budgets in order and central banks had to show credible — Reuters