The Washington-based institute, which serves as a think tank for major banks and mutual funds, has projected a record $225 billion of net private capital flows to emerging economies in 1996, up from $208 billion the previous year.
Net equity flows are set to grow to a record $110 billion, while net flows from non-bank creditors will rise to $50 billion, the institute predicts in a new report "Capital Flows to Emerging Market Economies."
Much of the increase is because investors are looking to higher yields in emerging markets as an alternative to low interest rates in the industrial countries. IIF expects mainstream investors such as pension funds and insurance companies to increase their allocations to emerging markets in order to enhance yields and expand their investment horizon.
"India, Indonesia and Thailand are all likely to attract more foreign investment in 1996, than they did last year," the IIF says, predicting direct investment of more than $10 billion to Asia, excluding China, this year. "Portfolio equity flows to Asia are forecast to rise to $19 billion in 1995, with India and south Korea attracting the largest flows." The record levels, however, may not continue into 1997. IIF forecasts that, barring unforeseen shocks, net private flows may slow to $210 billion next year, with much of the external finance being in the form of equity and longer-term debt.
The institute expects capital flows in 1997 to be increasingly used to finance the current account deficit, rather than boost reserves. It warns that slowing export growth in the emerging economies is not being fully matched by a slowdown in imports, leading to a substantial increase in the aggregate current account deficit this year.
The current account deficit is primarily likely to worsen in Asia, where IIF forecasts it will increase to $68 billion this year, up from $39 billion in 1994-95. China is among the worst affected, with loss of export competitiveness and tariff cuts leading to a $5 billion deficit in 1996, after a surplus of $6 billion in 1995. Meanwhile, the institute has also forecasted record international bond issues, with $57.3 billion worth of bonds issued in the first eight months of this year.
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Asian borrowers issued bonds worth $19.5 billion in the first eight months of the year, with maturities lengthening to 9.7 years, from 7.7 years in 1995.
Significantly, net official flows will fall sharply to about $14 billion this year, after last year's record of $47 billion caused by the financial support for Mexico. The sharp decline indicates a return to the earlier trend of heavy reliance on the private sector for finance.
IIF has also signalled its disapproval of more Mexico-like bailouts. "Market participants do not consider official bailouts as a realistic or desirable alternative... In an extreme case, where adjustment in the face of a crisis is inadequate, market confidence is not stabilised, and foreign exchange obligations cannot be met, debtors and creditors should address the problem without IMF or G-7 orchestration," IIF managing director Charles Dallara said in an open letter to interim committee chairman Phillippe Maystadt in an open letter released here yesterday.