Institute warnson capital inflows
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Hürriyet Daily News
Oluşturulma Tarihi: Ocak 29, 2009 00:00
ISTANBUL - The volume of net private capital inflows into emerging markets is estimated to be at $165 billion this year, as opposed to $929 billion in 2007. A recent report by the Institute of International Finance, or IIF, points to a hard year for emerging market economies, such as Turkey
As the global financial crisis blocks lines of credit, capital inflows to emerging markets are at risk, according to a report by the Institute of International Finance, or IIF. In its report published Tuesday, the institute warned the volume of net private capital inflows is likely to be $165 billion this year, after an estimated $466 billion in 2008. Compared with the record 2007 volume of $929 billion, the estimate for 2009 represents a contraction of 6.6 times.
The decline is in line with expectations of "negative world growth in 2009," according to Charles Dallara, managing director of IIF. "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," Dallara said.
Turkey to be badly affected
The most substantial fall from previous levels will be for "Emerging Europe," which Turkey is a part of. Governments in many Emerging European countries- especially those subject to International Monetary Fund programs, such as Hungary, Ukraine and possibly Turkey, will be required to run "contractionary, rather than expansionary, fiscal policies," the report said.
The volume of net private capital flows to Emerging Europe is projected to stay at just $30 billion, after an estimated $254 billion in 2008 and $393 billion in 2007.
Net private capital flows into Latin America are expected to be halved, with a forecast 2009 volume of $43 billion following $89 billion in 2007 and $ 184 billion in 2006. For Emerging Asia, the projected volume of inflows is $65 billion, after $96 billion last year and $315 billion in 2007.
Aside from the credit crunch in advanced economies, another reason for the capital inflow bottleneck is the decline in commodity prices, including oil, the institute said. Average growth in advanced economies will be negative 2.1 percent this year, the IIF predicted, while average growth in emerging markets is predicted to be 2.7 percent, as opposed to 5.7 percent in 2008. "Overall, global output is likely to see negative growth of 1.1 percent in 2009 after a 2 percent advance in 2008," the report said.
Emerging market institutions will need to refinance about $20 billion a month in the first half of 2009, according to IIF estimates, while the report notes that the current supply of credit covers only half of that amount. The biggest contraction in the supply of capital is likely to be from commercial banks, which are forecast to make a net withdrawal of $61bn in 2009, according to the institute.
Vigilance necessary
Speaking at a press conference Tuesday, William R. Rhodes, Vice Chairman of the IIF’s Board of Directors, said the outlook poses "major questions" on potential capital shortfalls to emerging market countries. "There is no room for complacency," Rhodes said. "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."
To overcome emerging problems, resources of the IMF should be expanded, he added. "The IMF needs to move with speed to support fully the economic policies that emerging market countries are now pursuing to mitigate the impact of the recession in the mature economies," Rhodes said.
Yusuke Horiguchi, IIF’s chief economist, added that net foreign direct investment flows to emerging markets have historically been more stable and a similar pattern is expected for 2009. Despite the global downturn in growth, it is likely that these flows will total over $195 billion, compared to $260 billion last year and $304 billion in 2007. Still, these forecasts "have to be viewed with some caution," he said, as the significant decline in global capital spending, the erosion of corporate profits and the decline in commodity prices may "lead to lower new international investment in extractive industries."
In addition, global weakness in real estate prices will curb foreign direct investment in the construction sector, notably in the tourism and residential areas," Horiguchi said.
Net portfolio equity flows were strongly negative in 2008 amounting to $89 billion, and the IIF forecast that, with equity positions smaller and prices much lower, outflows this year are likely to be modest at around $3 billion.
The decline is in line with expectations of "negative world growth in 2009," according to Charles Dallara, managing director of IIF. "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," Dallara said.
Turkey to be badly affected
The most substantial fall from previous levels will be for "Emerging Europe," which Turkey is a part of. Governments in many Emerging European countries- especially those subject to International Monetary Fund programs, such as Hungary, Ukraine and possibly Turkey, will be required to run "contractionary, rather than expansionary, fiscal policies," the report said.
The volume of net private capital flows to Emerging Europe is projected to stay at just $30 billion, after an estimated $254 billion in 2008 and $393 billion in 2007.
Net private capital flows into Latin America are expected to be halved, with a forecast 2009 volume of $43 billion following $89 billion in 2007 and $ 184 billion in 2006. For Emerging Asia, the projected volume of inflows is $65 billion, after $96 billion last year and $315 billion in 2007.
Aside from the credit crunch in advanced economies, another reason for the capital inflow bottleneck is the decline in commodity prices, including oil, the institute said. Average growth in advanced economies will be negative 2.1 percent this year, the IIF predicted, while average growth in emerging markets is predicted to be 2.7 percent, as opposed to 5.7 percent in 2008. "Overall, global output is likely to see negative growth of 1.1 percent in 2009 after a 2 percent advance in 2008," the report said.
Emerging market institutions will need to refinance about $20 billion a month in the first half of 2009, according to IIF estimates, while the report notes that the current supply of credit covers only half of that amount. The biggest contraction in the supply of capital is likely to be from commercial banks, which are forecast to make a net withdrawal of $61bn in 2009, according to the institute.
Vigilance necessary
Speaking at a press conference Tuesday, William R. Rhodes, Vice Chairman of the IIF’s Board of Directors, said the outlook poses "major questions" on potential capital shortfalls to emerging market countries. "There is no room for complacency," Rhodes said. "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."
To overcome emerging problems, resources of the IMF should be expanded, he added. "The IMF needs to move with speed to support fully the economic policies that emerging market countries are now pursuing to mitigate the impact of the recession in the mature economies," Rhodes said.
Yusuke Horiguchi, IIF’s chief economist, added that net foreign direct investment flows to emerging markets have historically been more stable and a similar pattern is expected for 2009. Despite the global downturn in growth, it is likely that these flows will total over $195 billion, compared to $260 billion last year and $304 billion in 2007. Still, these forecasts "have to be viewed with some caution," he said, as the significant decline in global capital spending, the erosion of corporate profits and the decline in commodity prices may "lead to lower new international investment in extractive industries."
In addition, global weakness in real estate prices will curb foreign direct investment in the construction sector, notably in the tourism and residential areas," Horiguchi said.
Net portfolio equity flows were strongly negative in 2008 amounting to $89 billion, and the IIF forecast that, with equity positions smaller and prices much lower, outflows this year are likely to be modest at around $3 billion.