*EPF418 09/20/01
Text: Global Bankers Forecast Sharp Drop in Financial Flows
(IIF sees only modest rebound in 2002) (1360)
A global organization representing some of the world's largest financial institutions forecasts the volume of private capital flows dropping by nearly a third this year as the terrorist acts of September 11 have put the brakes on an already weak global economy.
The Institute of International Finance (IIF), which represents more than 300 commercial and investment banks, projects private capital flows at only $106,000 million in 2001 -- a sharp drop from $167,000 million last year. Flows are projected to rebound to just $127,000 million in 2002, the IIF said in a press release issued September 20.
IIF Managing Director Charles Dallara said that while the official actions taken since the terrorist acts have "demonstrated strong leadership and have provided sorely needed confidence," further actions are needed to shore up the global economy.
Dallara urged further monetary easing in Japan, fiscal stimulus in Europe, and possibly a spending package in the United States that goes beyond the $40,000 million terrorism-response bill approved by Congress.
He also said "new forms of intensified global cooperation" are needed between policy makers in industrial and emerging market economies.
The IIF forecast economic growth in the G-7 countries will slow to 0.8 percent this year from 3.2 percent in 2000 in reaction to the terrorist events and a further weakening of consumer and investor confidence. Growth among emerging economies is forecast to halve this year from last year's 5.6 percent.
Note: In the following text, billion equals 1,000 million.
Following is the text of the IIF press release:
(begin text)
Washington DC, September 20, 2001 -- The tragic events of September 11 have heightened economic and financial uncertainties against the background of an already weak global economy. This poses exceptional challenges to the world's financial leaders and the Institute of International Finance (IIF) called today for a coordinated policy response "that lays the basis for renewed global economic expansion, while taking account of the particularly difficult circumstances facing emerging markets."
The IIF, the global association of financial institutions represents more than 300 commercial banks, investment banks and other global asset management firms. It released a policy letter today by its Managing Director, Charles Dallara, on behalf of its members to U.K. Chancellor of the Exchequer Gordon Brown in his role as Chairman of the International Monetary and Financial Committee of the International Monetary Fund (IMF). Mr. Dallara noted that in spite of a decade of reforms in many countries, "the near-term outlook for financial flows to emerging markets is at its most sobering level since the difficult years of the debt crises in the 1980s."
Mr. Dallara stated that the official actions of recent days demonstrated strong leadership and have provided sorely needed confidence. Nevertheless, further actions are necessary to ensure the recovery of the global economy. He said that there is a need to use the current situation to forge new forms of intensified global cooperation, not only between policy-makers in the industrial and emerging market economies, but also between public authorities and private financial institutions. He added that, "the recent successful efforts to ensure the smooth functioning of clearance and settlement systems stand out as a prime example of cooperation that we can learn from."
The IIF forecast that the latest events will heighten risk aversion by international investors in emerging market assets. With net private capital flows already declining to the leading emerging market economies, the IIF said it now forecasts this year's volume to amount to only $106 billion, compared to $167 billion last year. A modest rebound to $127 billion is projected for 2002.
Net flows from private creditors, including net bond flows, are expected to be a negative $22 billion this year after a gain of $20 billion in 2000 and are forecast at $10 billion for 2002. Net portfolio equity flows will be less than $4 billion, compared to around $16 billion in 2000. These flows are seen as totaling $9 billion next year. However, direct equity investment this year, at $124 billion, will be close to last year's total of $130 billion, but it is expected to decline to $108 billion in 2002.
The IIF forecast that economic growth in the G7 industrial countries will be 0.8 percent this year after rising by 3.2 percent last year. The U.S. economy is seen as slipping into a mild recession for the second half of this year on a further weakening of investor and consumer confidence and the broad impact of the events of September 11. The IIF forecast that growth in emerging market economies will be 2.8 percent compared to 5.6 percent last year. This decline largely reflects the fact that the dollar value of emerging market exports is seen falling by two percent this year after a 22 percent rise in 2000.
Today's IIF letter proposes a series of actions to respond to the new environment. On industrial countries, Mr. Dallara welcomed the cooperative actions of leading central banks. On the U.S., he noted the $40 billion spending package approved by the U.S. Congress and he stated that further measures may be needed. He said that macroeconomic policies in Europe need to "shift decisively into countercyclical gear," while Japan, which has also joined in further monetary easing, will need to persevere with critical structural reforms.
Multilateral Financial Institutions: Mr. Dallara stressed the importance of concrete and visible IMF support for emerging market economies that may come under intense pressure and that are also willing to adjust to the weaker global economy. As the Fund reviews its policies and considers additional support it may, for example, take steps to increase the usefulness of Contingent Credit Lines; extend Emergency Assistance promptly in select cases; and it could temporarily, ease surcharges under its Supplemental Reserve Facility. He stressed-that these actions by the IMF "could provide critical financial and moral support for the authorities struggling with already difficult circumstances, in particular as political support for reforms may be fragile."
Mr. Dallara added that further support should be considered for emerging market economies by the World Bank and the regional development banks. These may embrace accelerated disbursements in countries where reform programs are under way and the placing of some project and policy-based loans that are currently in an early stage on a fast-track review.
Emerging Market Economies: The IIF stressed the need for authorities to persist with sound macroeconomic policies and continue to intensify ongoing structural reforms even in this exceptional environment.
Mr. Dallara stated: "These keystones for shoring up investor confidence should be supplemented by stepped-up efforts to build and intensify investor relations programs designed to sustain vital support in their investor base. The required short term focus on macroeconomic stability should not deflect authorities from continuing to address other key areas especially financial sector soundness. It is important that hard-won gain from earlier reforms not be lost under the current circumstances."
Market Participants: The IIF stressed the need for prudent risk management. Nevertheless, it called on firms to determine their credit risk positions in emerging markets in light of the underlying medium-term creditworthiness, taking into account the continuity of reform policies.
Emerging Market Economies' External Financing
(billions of dollars)
1998 1999 2000 200lf 2002f
Current Account Balance -8.2 23.5 47.8 19.2 -18.5
External Financing, net 195.2 151.7 165.7 135.7 147.5
Private flows, net 143.3 141.2 166.7 106.1 127.3
Equity investment, net 134.3 163.1 146.4 128.2 117.0
Direct equity, net 120.7 147.6 130.2 124.4 108.0
Portfolio equity net 13.6 15.5 16.3 3.8 9.0
Private creditors, net 8.9 -21.8 20.3 -22.1 10.3
Commercial banks, net -54.7 -47.5 -5.8 -22.5 -2.3
Nonbanks, net 63.6 25.6 26.1 0.4 12.6
Official flows, net 52.0 10.5 -1.3 29.6 20.2
IFIs 38.3 1.5 2.7 30.5 22.0
Bilateral creditors 13.6 9.0 -3.9 -0.9 -l.8
Resident lending/other,net -146.1 -120.2 -142.6 -99.1 -95.8
Reserves (- = increase) -40.9 -54.9 -70.6 -55.8 -33.1
f=forecast
(1) Including net lending, monetary gold, and errors and omissions.
Institute of International Finance: September 20, 2001
(end text)
(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
NNNN