With the Asian, Russian, and Brazilian financial crises receding into the past, international lenders and investors appear to be recovering their confidence in emerging markets, according to a report by the Institute of International Finance (IIF) released on January 24. In Capital Flows to Emerging Market Economies, the IIF projects that net private capital flows to 29 leading emerging market economies will rise to $190 billion in 2000 from about $150 billion in both 1998 and 1999.
Foreign direct investment (FDI), which constituted the bulk of private capital flows into emerging market economies in 1997-98, rose to $140 billion in 1999 from $120 billion in 1998, and the IIF projects that it will continue to be strong in 2000. Portfolio equity investments into these economies have picked up again after a two-year hiatus and are expected to increase to $34 billion this year from $17 billion in 1999. The IIF expects total FDI and portfolio equity flows this year to match the record volume of $155 billion registered in 1999.
Asia and Latin America
Flows to Asia (China, India, Indonesia, Korea, Malaysia, the Philippines, and Thailand) and Latin America (Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and Venezuela) are picking up the fastest, according to the report. Net private flows to Asia are expected to reach $60 billion in 2000 from about $40 billion in 1999 and only $6 billion in 1998. Within Asia, the economies that were hardest hit in 1997-98—and that experienced large negative private flows—should receive modest net private inflows this year. Private flows to China should increase significantly in 2000, while those to Korea are likely to strengthen further.
Private flows to Latin America are expected to rise to about $90 billion this year after falling to about $69 billion in 1999. Net private credit flows to the region should increase to $35 billion from only $8 billion in 1999, with Brazil accounting for the bulk of the rebound. The IIF expects net private flows to Brazil to amount to almost $40 billion this year compared with less than $20 billion in 1999, when the country made substantial net repayments to foreign creditors around the time of its exchange rate crisis. It further projects that net private flows to Argentina will remain substantial at about $14 billion this year and that those to Mexico will stabilize at about $19 billion.
Europe, Africa, and the Middle East
Private flows to emerging market economies in Europe (Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, and Turkey) are expected to remain stable, at slightly more than $30 billion, in 2000. Equity flows account for about 60 percent of this figure. According to the IIF, net flows to Russia may turn negative this year as the country makes net repayments to some of its creditors. The IIF expects private flows to Africa and the Middle East (Algeria, Egypt, Morocco, South Africa, and Tunisia) to increase moderately this year, largely because of stronger flows to South Africa resulting from improved market sentiment.
|Private flows, net||327.9||265.7||147.8||148.7||193.1|
|Five Asian economies3||108.1||-0.2||-36.4||-3.7||7.8|
|Official flows, net||7.6||38.9||52.8||11.9||9.1|
|Five Asian economies3||-1.6||29.9||26.9||1.4||6.3|
The IIF cautions that, despite this encouraging prospective rebound, the recovery remains tentative for a number of reasons. First, developments in industrial country financial markets—in particular, possible sharp increases in U.S. interest rates and a substantial stock market correction—could have an adverse effect on financial flows to emerging market economies. Second, a number of emerging market economies are holding elections this year, raising questions about the ability of their authorities to continue to follow prudent macroeconomic policies and persevere with structural reforms in the face of electoral pressures. A third consideration is the concern of private investors and lenders that official sector policies in these countries may harm their interests. The forecasts for 2000 assume that no emerging market economy will experience a severe financial crisis, but the report emphasizes that the possibility of such a shock cannot be ruled out.