*EPF413 01/16/2003
Text: Capital Flows to Emerging Markets Could Rise in 2003
(IIF forecasts modest growth following decline in 2002) (1590)

Private capital flows to emerging market economies are expected to grow modestly in 2003 for a net total of $137,100 million, up from $112,5000 million in 2002, the Institute of International Finance (IIF) says.

In a January 16 news release, the IIF, a global association of 320 financial institutions, reported that the 2002 figure for emerging market capital flows was the lowest in a decade and well below the $185,000 million annual average for the 1990s. It attributed the decline to a weak global economy, geopolitical concerns and weakening investor support for emerging markets.

The IIF said its forecast for 2003 rests on expectations of continued global economic recovery and an improvement in the economies of Latin America as well as ongoing economic reforms in most emerging markets. The IIF forecast also assumes an easing in oil prices in the second half of 2003 following a rise early in the year due to tensions in the Middle East.

"This is not a particularly rosy picture we present to you today," IIF Managing Director Charles Dallara told reporters at a news briefing. He indicated, however, that 2003 could be a "critical year" for restoring confidence and rebuilding the investor base for emerging economies.

The Asia-Pacific region is expected to attract the most investors, with private financial flows projected to reach $62,500 million in 2003, up from $61,800 million in 2002. The IIF said that China alone accounted for more than 85 percent of the region's foreign direct investment in 2002, attributable in part to that country's accession to the WTO.

The situation in Latin America is set to improve, the IIF said, with capital flows projected to rise to $35,500 million in 2003, up from $25,200 million in 2002. Dallara told reporters that the IIF has been "encouraged" by early statement made by the new government in Brazil, and expects a stabilization of the economy in Argentina. He said that Mexico and Chile -- both having strong economic ties to the United States -- also are expected to do well as long as the U.S. economy continues to grow.

Capital flows to emerging markets in Europe are also set to improve, rising to $31,000 million from about $21,700 million in 2002, according to the IIF.

Africa and the Middle East are forecast to attract $8,100 million in foreign investment 2003, up from $3,800 million in 2002.

The text of the full IIF report on capital flows to emerging markets is available on the Web at:
http://www.iif.com/data/public/cf_0103.pdf

Following is the text of the news release:

(Note: In the text "billion" means 1,000 million.)

(begin text)

Institute of International Finance, Inc.
http://www.IIF.com

Net Private Capital Flows to Emerging Markets Continued to Retreat in 2002 -- IIF Forecasts Modest Gain for 2003

2002 Volume of $112.5 billion compares to 1990s annual average of $185 billion.

Washington, DC, January 16, 2003 -- Net private capital flows to emerging market economies continued to retreat last year to total $112.5 billion from $125.7 billion in 2001, which was the lowest total seen in a decade and well below the 1990s annual average level of $185 billion. The Institute of International Finance (IIF) forecast a modest improvement to $137.1 billion for 2003.

"Investors remain reluctant to increase their commitments to emerging market economies," said IIF Managing Director Charles Dallara. He noted, "weak growth in the major industrial countries and geopolitical concerns have combined with an erosion in investor support for the emerging markets' asset class. This could be a critical year to restore confidence and rebuild the investor base if there is a strengthening of the overall global economy and, even more importantly, if there is firm evidence of sustained sound macro-economic policies and structural reform across the emerging market economies."

The IIF, the global association of financial firms representing 320 financial institutions, reported that the 2003 projected increase in net private capital flows rests on expectations of continued global economic recovery, albeit a modest one. It also assumes some improvement in the economies of Latin America and an easing in oil prices in the second half of 2003, after a rise in the first half, as Middle East tensions are expected to subside.

Mr. Dallara stated at a press conference here that, "notwithstanding the important progress that has been made in a number of important economies, we have witnessed the declining appetite of investors for the emerging markets' asset class since the series of crises that began in Mexico in 1995. The momentum of structural reform and privatization has slowed in a number of countries, which has further eroded investor sentiment."

IIF First Deputy Managing Director and Chief Economist Yusuke Horiguchi stated that, "the new data indicates increasing differentiation by investors between different countries and regions with rather limited contagion evident from crisis countries, such as Argentina. The differentiation is positive evidence of improving investor risk management. It suggests that implementation of sound policies in emerging market economies will meet with favorable market responses."

The Institute pointed out that net direct equity investment in 2002 accounted for around $107 billion of the overall total of flows of close to $113 billion. This volume, and the similar total of $108 billion projected for 2003, are significantly below the annual foreign direct equity totals seen since 1996."

Asia/Pacific is seen as attracting net foreign direct equity investment of $55 billion this year after about $52 billion in 2002, and the IIF noted that China alone accounted for over 85 percent of last year's total. It stated that China experienced a strong WTO [World Trade Organization]-related increase in direct investment that is expected to continue into 2003. Stepped-up privatization boosted net inflows of direct equity to emerging Europe last year to nearly $17 billion, and the IIF forecasts the 2003 total at $16 billion. Net direct equity investment in Latin America fell to $36 billion in 2002 from $55 billion in 2001, and it is projected to decline to $34 billion this year.

IIF Net Private Financial Flows to Emerging Market Economies
By Region and Real GDP Growth

1999 2000 2001 2002e 2003f Real GDP Real GDP
growth growth
2002e 2003f
Total 148.2 185.6 125.7 112.5 137.1 3.3 4.5
Latin
America 69.7 62.6 47.8 25.2 35.5 -1.5 2.4
Europe 38.3 42.2 17.0 21.7 31.0 3.8 3.4
Africa/
Mideast 10.2 4.7 9.3 3.8 8.1 2.8 3.8
Asia/
Pacific 30.1 76.2 51.6 61.8 62.5 6.4 6.3

e=estimate, f=forecast

Economic growth in both Asia and emerging Europe is likely to continue this year at levels close to those seen in 2002, with Asian growth of just above 6 percent far outpacing other regions. The IIF forecasts that output in Latin America is likely to stabilize and improve slightly after 2002's extremely poor performance.

Emerging market portfolio equity investment has been at very low levels in recent years, but a modest uptick to $9 billion is expected for 2003 after net outflows of nearly $5 billion in 2002. Overall, emerging stock markets saw declines in 2002 of just under 5 percent in U.S. dollar terms. Particularly hard hit last year were equities in Latin America, which dropped by close to 26 percent, as the crisis in Argentina and volatility in Brazil and Venezuela shook confidence.

The IIF stressed that non-bank flows of capital (mostly bonds) were severely depressed during the last two years. Excluding the ongoing accumulation of interest arrears in Argentina, which are counted as a capital inflow in balance of payments data, net non-bank flows are seen as reaching $16 billion this year after $12 billion in 2002, compared to an annual average volume of about $44 billion over the last decade.

In a special section in the IIF's new report on bond flows the Institute stated that the 2002 and 2003 volumes are lower than at any time since 1990 as new disbursements have fallen relative to repayments. Mr. Horiguchi said that, "although credit flows are unlikely to experience further contraction and are likely to stabilize as the global economy gains momentum, we expect that it could be several years before emerging market bond flows are restored to the significantly higher levels that were seen during the 1990s."

The IIF pointed out that net repayments to commercial banks are expected to continue this year, although at a more modest rate than in recent years. In part, the overall trend of commercial bank lending to emerging markets of recent years reflects a continuing shift by internationally active institutions from new lending for their own balance sheets to fee-based activities, in part due to improved risk-management methods. Moreover, as today's report noted, international commercial banks are also taking an increasingly active role in local currency lending rather than external financing.

Major emerging markets included in the IIF's report on capital flows are the following:

Africa/Middle East: Algeria, Egypt, Morocco, South Africa, Tunisia

Asia/Pacific: China, PR, India, Indonesia, Malaysia, Philippines, South Korea, Thailand

Europe: Bulgaria, Czech Republic, Hungary, Poland, Romania, Russian Federation, Slovakia, Turkey

Latin America: Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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