*EPF411 01/15/2004
Text: Private Capital Flows Projected to Grow Again in 2004, Report Says
(But markets might have gone "too fast, too far," banking group warns) (1810)

Net private capital flows to emerging markets are projected to grow slightly in 2004 after surging 50 percent in the past year, a global association of major financial institutions says.

These flows are expected to rise to $196 billion in 2004 from $187 billion in 2003 and $124 billion in 2002, according to the report published January 15 by the Institute of International Finance (IIF).

"We had a very good year in emerging markets in 2003," Charles Dallara, IIF managing director, said at the same day news briefing.

He warned, however, about "undesirable uncertainty" in the global economy. He said that, while the IIF forecast assumes accelerating growth in Western Europe, North America and in many emerging economies, "greater than expected rises in U.S. interest rates and unanticipated events in financial markets could reduce the level of net private capital flows ... and could possibly lead to a widening of spreads."

Dallara said that a further fall in U.S. dollar value also might hurt these flows, particularly if it becomes "disorderly."

He said that very low interest rates in major industrial countries in 2003 combined with improved policy performance in some emerging economies gave investors incentives to seek higher yields in emerging markets.

Dallara cautioned, however, that policymakers, lenders and investors are reaching the point at which they should start being cautious again. Eagerness to invest in emerging markets might have gone "too far, too fast," he said.

He said that the valuation of some countries' assets -- including those of Poland, the Philippines and Venezuela -- has increased quickly despite stagnation or near stagnation and decline in their credit quality.

In a January 15 IIF news release announcing publication of the report, Citibank Chairman William Rhodes stroke a similar note of caution when he said that markets may be moving ahead of fundamentals, in a way they did in 1997 prior to the Asian crisis. He said that the governments of developing countries must continue pursuing correct macroeconomic policies and structural adjustments while investors and lenders need to pay more attention to differentiations among emerging market assets and risks associated with particular economies.

The IIF report projected that Asia is likely to account for half of total net flows to emerging markets in 2004.

Dallara said that economic and financial conditions in several emerging markets, particularly in Brazil and Turkey, improved "significantly" the past year. He said Brazil has made "tremendous" progress in regaining credibility and confidence of international investors and its economy is very likely to rebound in 2004.

Dallara said that policies of the Brazilian government contrast with those of its neighbor, Argentina, which he called "shortsighted" because of the focus on short-term results. He said that the recovery seen so far in Argentina is not based on sound fundamentals and thus may not be sustainable.

Dallara said that lawsuits against Argentina brought by disgruntled bondholders are not the best way to deal with that country's financial obligations. He said that court proceedings may complicate Argentina's debt restructuring negotiations and its dealings with the International Monetary Fund (IMF).

Nevertheless, he said that Argentina itself is to blame for emerging complications because it has refused to engage in direct talks with bondholders for two years. He said that, in an unprecedented action, different groups of Argentina's creditors from different countries have recently united in establishing a global creditor committee to represent them in negotiations with the government of that country. Argentina's government stopped paying private-sector creditors after defaulting on about $100 billion in bonds in 2001 although it resumed servicing its debt to the IMF and World Bank shortly afterwards.

Dallara also criticized the IMF for its continued lending to Argentina in an apparent departure from its stated policies, which require countries in default to creditors to negotiate in good faith. He said he is concerned how deviations from these rules may affect attitudes and policies of other countries facing financial difficulties.

Following is the text of the IIF news release:

[Note: The full text of the release including tables can be viewed at http://www.iif.com/press/pressrelease.quagga?id=80
The full report can be viewed at http://www.iif.com/verify/data/report_docs/cf_0104.pdf]

(begin text)

Institute of International Finance, Inc.

Press Release

Net Private Capital Flows to Emerging Markets Rose Sharply
in 2003 and are Set to Continue at Robust Rate in 2004

IIF Chairman Josef Ackermann stresses need for prudent risk management

Washington, DC, January 15, 2004 -The Institute of International Finance (IIF) reported today that net private capital flows to emerging market economies rose sharply in 2003 to $187 billion from just $124 billion in 2002, a gain of 50 percent. The IIF forecast robust 2004 flows that are expected to rise to approximately $196 billion.

Dr. Josef Ackermann, Chairman of the IIF and Chairman of the Group Executive Committee, Deutsche Bank AG, stated that, "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. Prudent risk management by investors and creditors remains a priority."

Mr. William Rhodes, the IIF's First Vice Chairman and Senior Vice Chairman of Citigroup and Chairman of Citibank, said, "Sound economic polices and performance combined with easy monetary conditions and ample liquidity in financial markets supported the rising volume of flows to emerging markets last year. There is now a risk that markets may again be moving ahead of fundamentals, as was the case in 1997 prior to the Asian crisis."

Mr. Rhodes added, "It is important that today's high level of flows to emerging market economies not lead to complacency. The governments of these economies need to continue pursuing sound macro-economic policies and structural adjustments, while investors need to remind themselves of the importance of differentiation among emerging market assets and practice sound risk management."

The IIF, the global association of financial services institutions with over 340 members, stated in a report today that net private equity portfolio flows, which amounted to just $1.1 billion in 2002, reached $30.3 billion last year (China and Korea alone accounted for $19 billion) and it forecast a volume of $28.6 billion for 2004. The IIF said that bond flows, which amounted to only $17 billion in 2002, rose to $44.7 billion in 2003 and are likely to be a fraction higher at $45 billion this year, with Brazilian sovereign and corporate entities seen as the largest borrowers with a 2004 total of close to $13 billion.

IIF Managing Director Charles Dallara noted that, "Both bond and banking flows to emerging markets grew significantly last year. Looking ahead, we see those gains being broadly consolidated and direct investment moving to higher levels. Our forecasts today assume accelerating growth in Western Europe, North America and in many of the emerging market economies. However, greater than expected rises in U.S. interest rates and unanticipated events in financial markets could reduce the level of net private capital flows from the almost $200 billion that we are now projecting and could possibly lead to a widening of spreads."

The IIF pointed out that net direct equity investment fell to $93.6 billion in 2003 (it totaled $112.1 in 2002) and is expected to rise to $110.7 billion this year. Net banking flows, which have been negative for several years and fell by $6.2 billion in 2002, are projected to reach about $12 billion this year, down from approximately $19 billion in 2003 reflecting reduced lending to Asia.

IIF First Deputy Managing Director and Chief Economist Yusuke Horiguchi said that, "We anticipate 4.3 percent U.S. GDP growth this year, with the Eurozone economies growing by 1.7 percent and the U.K. [United Kingdom] and Canada rising by 3.5 and 3.3 percent, respectively. We see the Japanese economic growth rate slowing to about 1.7 percent. As for the emerging markets, our new projections indicate an overall 5.3 percent advance this year. This 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 IIF's report projected that Asia is likely to account for one-half of total net flows to emerging markets in 2004, with direct investment to this region alone amounting to around $60 billion. Emerging Europe's share of total net private flows is expected to increase to 27 percent this year from 22 percent in 2003, reflecting an appreciable increase in flows to Turkey. In Latin America, private flows are seen rising by $13 billion to $39 billion, up from $26 billion in 2003. Direct investment into Latin America is seen as amounting to $29 billion, with Brazil accounting for approximately three-quarters of this volume. Private flows to Africa/Middle East are likely to remain small at less than 3 percent of total flows.

Mr. Horiguchi added that, "A significant compression in spreads on emerging market bonds created the opportunity for a renewed pipeline of new issues both from sovereign and corporate entities. The compression in spreads occurred across all regions, with Latin America showing the largest decline. The decline in spreads was almost 50 percent last year after reaching a peak of nearly 1400 basis points prior to Brazil's election."

Today's IIF report stressed that, "In assessing the prospects for emerging market bonds this year a crucial question to be answered is whether or not the compression in spreads observed in the past year is sustainable." It noted that, "An unanticipated increase in U.S. interest rates, or a sudden slowdown in global growth, or a deterioration in credit quality could cause investors to reassess their risk-return tradeoffs, with likely negative consequences for emerging market bonds."

Emerging market portfolio equity investment is forecast to reach almost $29 billion in 2004 with the Asia/Pacific region accounting for nearly 90 percent of this total. The IIF report noted, "Despite the sharp rise in equity prices in emerging markets since early 2003, price earnings ratios are still appreciably below their 10-year average. Prospects for improved corporate profitability against a backdrop of stronger macroeconomic conditions and healthier balances sheets, resulting from continued deleveraging, should be supportive of continued strong net inflows this year."

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
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 Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

Return to Public File Main Page

Return to Public Table of Contents