Net private capital flows to emerging markets are likely to increase to $226bn this year from $213bn in 2003, with a further slight rise to $229bn next year, according to the latest forecast from the Washington-based Institute of International Finance (IIF). The increase is attributed to a rebound in direct equity investment from the eight-year low seen in 2003, continued strength of bond purchases and substantial net lending by commercial banks. This growth of flows comes at a time when the 29 economies involved are growing more rapidly than at any time in the last 20 years.
The IIF, the global association of financial services institutions with over 330 members, said that foreign direct investment (FDI) is expected to account for half of all private capital flows to emerging markets in 2004 and 2005. Commercial bank net lending is projected to exceed $31bn in 2004 for the second consecutive year, following net outflows for the period 1998-2002. The report noted net bond flows are likely to amount to $55bn this year after $58bn in 2003. Net bond financing is expected to exceed $50bn for the third consecutive year in 2005.
Overall, private capital flows to emerging markets are moving to levels that have not been seen since before the Asian Crisis of 1997/98. Net private capital flows to Asia are likely to account for slightly less than half of total net flows to all emerging markets this year, down from 55% in 2003. A further reduction in Asia’s share is likely next year as nearly all countries in the region, with the exception of China and Thailand, are expected to experience a slowdown in net private capital flows.
The report shows strong expansion, with the IIF forecasting 6.2% real GDP growth for this year for the 29 emerging market countries compared to 5.0% in 2003. For example, growth in Latin America is likely to accelerate to 5.1% this year as recovery takes hold in Brazil and Mexico. Increasing growth is being seen in all of the countries in this region with the exception of Argentina.
