Published January 28, 2009

Dramatic fall seen in private capital flows

Flows to emerging economies may crash 82% from '07 peak of US$929b: IIF


PRIVATE capital flows from advanced to emerging economies in Asia and elsewhere are projected to crumble dramatically to just US$165 billion this year from an estimated US$466 billion in 2008 as the fallout from the global financial and economic crisis continues to spread, the Institute of International Finance (IIF) in Washington announced yesterday.

'The current slump in net private capital flows to emerging markets is shaping up to be the most dramatic on record,' said the IIF, whose report came as a gloomy backdrop to the World Economic Forum in Davos, where world leaders are grappling with global recession.

The report by the IIF highlights the staggering reversal in global financial markets that is expected to see overall private capital flows from advanced to emerging economies crash by 82 per cent this year from their 2007 peak of US$929 billion.

At the same time, official multilateral lenders such as the International Monetary Fund, World Bank, Asian Development Bank and others whose lending had shrunk in recent years to a fraction of that from private capital markets are forecast to re-emerge, with projected flows of US$31 billion this year - way ahead of that in recent years.

The IIF warned that 'large emerging market corporate borrowers with sizeable roll-over needs' are most exposed to the collapse in private capital flows. These firms have at least US$100 billion of market-based debt falling due in the first half of this year but are unlikely to be able to raise more than one half of this amount, it added.

Although the majority of the exposed corporate borrowers are from emerging European economies that have gone on a borrowing spree in global capital markets in recent years, some of them are also from Asia and other developing regions of the world.

'Policymakers in both mature and emerging markets would be well advised to address the refinancing problem head on in the weeks and months ahead,' said the IIF, which speaks for nearly 400 of the world's leading banks and other financial institutions.

Just how fast the global financial situation is deteriorating is shown by the fact that only four months ago, the IIF projected capital flows to emerging markets to total US$562 billion in 2008 but has revised that figure down now to US$466 billion.

Every kind of private flow to emerging economies is facing a sudden drought, said the IIF but the most drastic fall is in bank lending which is expected to reverse this year to an overall net outflow of US$61 billion this year from a net inflow of US$167 billion in 2008.

Worst hit among Asian countries by the collapse in bank lending is South Korea, where net new lending is forecast to drop by US$87 billion this year from its level in 2007. China is also forecast to suffer a drop of US$52 billion in banking inflows over this period and India, a US$32 billion fall. Overall, Asia is expected to be less badly hit than other regions by the collapse in private capital flows, says the IIF.

Flows to emerging Asia are projected to drop to US$64.9 billion this year from an estimated 96.2 billion in 2008, although the fall from the 2007 level of US$314.8 billion was much more dramatic. 'In sharp contrast to 1997-98 (during the Asian financial crisis), the external financing picture for Asia remains one of relative strength,' said the IIF. 'Regional foreign exchange reserves are huge, (while) domestic financial institutions remain far more resilient.'

Emerging Europe, where corporate borrowers have had liberal access to global capital markets in recent years, is expected to see capital inflows implode to just US$30.2 billion this year or nearly one-tenth of their average over the preceding three years. Latin America is meanwhile projected by the IIF to see capital inflows more than halve this year to US$43.1 billion while Africa and the Middle East will see a slight rise to US$27.2 billion.

The IIF report said that even foreign direct investment in business ventures - supposedly the most stable element of private capital flows into emerging economies - could suffer if the global economic downturn continues or if financial system problems worsen. But it also suggested that the 'worst may be over' in emerging equity markets.