Capital Pipelines to Emerging Markets Expected to Ease
In 2007, net private capital flows to emerging markets were at a record $929 billion. In 2008, as the economic slump began weighing on the global marketplace, that figure took a steep nosedive to an estimated $466 billion. Now, while the world is in the clutches of crisis, the Institute of International Finance, Inc. (IIF) anticipates that private capital flows to emerging markets will struggle to be around $165 billion in 2009. This is a stark revision from the picture painted by the association just four months ago, when it predicted that net flows for the year would be around $562 billion. This was before the fourth quarter tailspin that further shook the confidence of banks and investors.
“Indeed, we are now anticipating negative world growth for 2009,” said IIF Managing Director Charles Dallara. “While all components of net private capital flows have recently weakened appreciably, the most significant weakness is for net bank lending where we now see a net outflow from the emerging markets of about $61 billion this year, after a net inflow last year of $167 billion and a record of $410 billion in 2007.”
For the first time since World War II, the IIF is forecasting global output to dip into negative growth of 1.1%, which is a substantial about-face from the 2.0% advance seen last year. This is primarily because of the recessions seen in many of the world’s supporting economies as well as the precipitous drop in the price of oil and other commodities.
Dallara foresees that the carnage will be widespread and no emerging market will be spared in the coming months, though the most substantially hit will be those European emerging markets—such as Turkey, Ukraine, Poland and Russia—where net private capital flows will fall from $254 billion in 2008 to just $30 billion this year. This will place considerable strain on a region that has been heavily reliant on external finance.
The outlook for Latin America is expected to be just as bleak as net private capital flows are cut in half from $89 billion in 2008 to $43 billion in 2009. Emerging markets in Asia will continue to see a decline, though nowhere near as halting as the drop seen last year when inflows plummeted from $315 billion in 2007 to $96 billion in 2008. For the year ahead, the IIF anticipates net private capital flows to emerging Asian markets to hover around $65 billion.
Non-bank credit flows to emerging markets are anticipated to be down sharply as well, amounting to a net $31 billion this year, a substantial decrease from the $125 billion seen in 2008 and several leagues away from the $222 billion in 2007. An interesting component could be Latin American sovereign countries like Argentina, Ecuador and Venezuela, which are expected to possibly increase their borrowing demand as they adopt more expansionary fiscal policies.
“Many of the leading emerging market economies have entered this very difficult period in healthier economic conditions than in the periods of crisis in the 1990s and in the 1980s, with lower inflation levels, stronger reserves, more pragmatic and more prudent economic policy leadership,” said Roberto Setubal, vice chairman and president, Banco Itau Holding Financeira S/A of Brazil. “At the same time, the leading banking institutions in many emerging market economies, which have largely avoided direct involvement in the subprime crisis, are not suffering from the same degree of distress as those in the mature economies.”
Despite the advances made by emerging markets leaders, Dallara said that there is no room for complacency.
“Vigilance on the part of leaders of the emerging market economies is all the more important given that their countries are susceptible to contagion from the mature economies, which will face enormous tests throughout this year,” said Dallara. “Indeed, there is a clear case for initiatives that ensure that the efforts made by these emerging market countries are backed with international office support.” At this, Dallara pointed out that the International Monetary Fund (IMF) needs to expand its resources and modify its approaches to providing financing.
Foreign direct investment to emerging markets is expected to at least remain stable. Despite the global slowdown, FDI to these markets will likely total over $195 billion, which is comparable to the estimated $260 billion in FDI last year and the $304 billion seen in the year before.
“Our forecasts for FDI have to be viewed with some caution, given a significant decline in global capital spending that is underway, the erosion of corporate profits and the decline in commodity prices,” warned Yusuke Horiguchi, first deputy managing director, IIF. “In addition, global weakness in real estate prices will curb FDI in the construction sector, notably in tourism and residential areas.”
Matthew Carr, NACM staff writer