Emily Vogl, Frank Vogl
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IIF Highlight Key Issues of Global Payments Imbalances and the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets
IIF Forecasts Relatively High Private Capital Flows to Emerging Markets - Outlook Points to Lower Volumes As Global Economy Slows and Liquidity Tightens
Singapore, September 15, 2006 — On the eve of the annual meetings in Singapore of the Institute of International Finance (IIF), the International Monetary Fund and the World Bank, the IIF's Chairman, Dr. Josef Ackermann, Chairman of the Group Executive Committee of Deutsche Bank AG, highlighted the favorable growth performance this year of the Eurozone, Japan and large parts of emerging markets, particularly those in Asia. He cautioned, however, that there are downside risks to the global economic outlook given the slowing U.S. economy.
Dr. Ackermann stated at an IIF press conference that, "The governments and central banks of the world's leading economies need to act now to pursue mutually reinforcing policies designed to secure non-inflationary growth and an orderly unwinding of prevailing current account imbalances. It is important that the finance ministers of the leading economies who are meeting here in Singapore demonstrate the political will to steer the global economy into safer waters."
Mr. William Rhodes, IIF First Vice Chairman and Chairman, President and CEO, Citibank N.A., and Senior Vice Chairman of Citigroup Inc., said, "The U.S. economy is the driver of the global economy and since the spring there has been a slowing of U.S. growth, prompted by a weakening in the housing market. Further deterioration in this sector is likely and it could have an important impact on U.S. consumption. We are also seeing signs of inflationary figures. While growth performance in the Eurozone and Japan has been encouraging this year, it is not sufficient to offset the global implications of the negative turn in the U.S. outlook. This points to a more difficult period ahead for the global economy and one that could be challenging for emerging markets."
The IIF, the global association of financial institutions with over 360 member institutions operating across the world, forecast in a report today that total net private capital flows to emerging markets will reach $418 billion this year, which is down from the record of $480 billion set in 2005, but this is nevertheless the second largest volume ever. It projected a continuation of the downward trend next year to $404 billion and said this partly reflects an expected slowdown in global growth and overall investment activity.
In view of these trends, Dr. Ackermann said it is particularly noteworthy that an increasing number of sovereign issuers and private financial institutions are making progress to implement the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets. He noted that the inaugural meeting of the Group of Trustees on the Principles will take place here and will be co-chaired by ECB President Jean-Claude Trichet, Brazil's central bank Governor Henrique de Campos Meirelles, and by Mr. Toyoo Gyohten, a former senior Japanese official and former Chairman of the Bank of Tokyo. The Principles are, "An extraordinary financial system innovation. They are creating a framework for public-private dialogue and cooperation that is not only innovative, but essential given the dominant position that the private sector has assumed as the source of external capital for emerging market economies."
Emerging Market Issues
The new IIF report projected that net private equity investment into emerging markets will reach a record $260 billion this year (after $241 billion in 2005), but net flows from private creditors will be down to $158.3 billion ($240 billion). The IIF also forecast that net official flows will again be negative at
$48 billion ($56 billion), meaning that emerging market countries are paying back more to multilateral and bilateral creditors than they are receiving in new credits.
Mr. Rhodes noted at the IIF press conference that, "In the late spring, we saw how negative shocks can swiftly prompt sharp corrections in the emerging markets. This episode can and should influence the actions of emerging market sovereign issuers and investors alike today in view of the more challenging global economic environment that is developing. The governments of emerging market countries need to continue to pursue consistent and sound macro-economic policies, while moving forward with structural reforms. Investors need to better differentiate among emerging markets and assess whether policies are in place in individual countries that will reduce their vulnerability to changing external conditions."
Investor Relations & Data Transparency
IIF Vice Chairman Roberto Setúbal, President of Banco Itaú in Brazil, said that a key aspect of the Principles is its emphasis on investor relations and data transparency. He noted that the IIF is publishing a report today that assesses how 32 emerging market countries are performing in these areas. He stated, "Brazil ranks as the best performer in these areas, followed by Korea. The standards of best practice that Brazil is now displaying need to be replicated by many other emerging market countries. Those that lag behind - and there are many who do - may experience particular difficulties at times when general global market sentiment is less supportive. These countries should be encouraged to improve by the good examples noted in the new IIF report."
Emerging Markets' Growth
IIF Managing Director Charles Dallara said that, "Our report today emphasizes the downside risks facing the global economy given the potential for continuing high and volatile energy prices, huge global current account imbalances, and elevated geopolitical tensions. We see some moderation in the growth outlook for industrialized countries, nevertheless, it is possible that emerging market economies overall may achieve growth this year of 6.7 percent, slightly above that of last year."
Forecasts for Capital Flows
The IIF said the bulk of the slowdown in total net private capital flows this year, compared to 2005, is likely to be accounted for by a reduction in net borrowing from commercial banks and from other private creditors (mostly the bond market) as many sovereign and private borrowers took the opportunity of very favorable market conditions last year to pre-finance obligations due in 2006. A number of countries are also buying back a sizable volume of their bonds with high coupon rates while companies repay short-term bank credit facilities used to finance a broad range of transactions. Looking ahead, it added that, "the volume and pattern of private capital flows projected in this report reflects the reduction in global liquidity that has already taken place which is changing the perception of the balance of risks and rewards, thereby altering the choices investors make in their portfolio selection."
Investment: The IIF said that generally favorable outlook for economic growth in emerging market countries, as well as solid corporate profits, favorable financing conditions and generally strong stock market performance are attracting record levels of direct equity investment. Net direct investment flows in 2006 are projected to exceed $200 billion ($186 billion in 2005) are likely to remain above $190 billion in 2007.
Direct investment into Asia/Pacific is forecast is likely to fall below the peak of nearly $85 billion reached in 2005, as some slowing in inflows to China is expected, with a forecast of $57 billion for this year (a record $68 billion in 2005). Direct investment into India is seen rising to $7 billion this year ($6billion). A substantial rise is seen for Emerging Europe to almost $66 billion this year ($37 billion) with particularly substantial direct investment gains seen into Turkey and Russia. Net direct investment into Latin America is expected to decline to $40 billion this year ($47 billion) partly because of rising foreign direct investment by Brazilian companies. In the Africa/Middle East region, net direct equity investment could reach a record level of more than $20 billion this year, following net inflows of $17 billion last year. Egypt is likely to surpass South Africa as the recipient of the largest amount of direct investment in the region, taking in $5 billion of net flows this year, said the IIF.
Net portfolio investment in 2006 is forecast to increase slightly to $58 billion ($55 billion) of which fully $40 billion is expected to flow into Asia/Pacific. The strength of this sector is partly attributed by the IIF to the generally strong economic fundamentals in many emerging market countries and to the recent revival of inflows into actively managed emerging market portfolios. However, today's report noted that emerging market equities still have risks with which to contend, including a further contraction in global liquidity, a buildup in cost pressures that could have a negative impact on companies' earnings, and a sudden reduction in risk appetite.
Bonds: After reaching a record high $107 billion last year, net non-bank private sector lending, mostly in the form of bond purchases, is expected to decrease sharply in 2006 to about $68 billion before rebounding to $84 billion next year. Emerging Europe is projected to account for more than 60 percent of these flows this year with Russia accounting for one-half of the flows to the region. Flows to the Asia/Pacific region are expected to increase this year to $31 billion ($29.3 billion) and fall back to about $23 billion in 2007. However, Latin America is seen as experiencing net repayments to non-bank creditors this year of $8.5 billion (lending was $3.5 billion in 2005) and the IIF projected that a respite from debt buybacks should allow net lending to exceed $9 billion in 2007.
The IIF said that, "Overall external bond issuance of $69 billion in the first eight months of 2006 fell behind the $85 billion for the same period last year. With sovereign entities having already met nearly all of their borrowing requirements for this year, it seems unlikely that total issuance will exceed last year's $128 billion even with the continuation of strong borrowing by corporate entities."
Bank Lending: Net commercial bank lending is projected to exceed $90 billion in 2006 after a record of nearly $132 billion last year. The decline stems from the repayment of short-term loans used by companies last year to make acquisitions, particularly in the energy sector. In addition, authorities in some countries are attempting to reduce credit growth as part of overall demand management policies. This trend is likely to carry into next year with net commercial banks lending slowing to $74 billion.
Emerging Europe is seeing substantial net banking inflows. Last year these totaled $77 billion and they are expected to amount to $56 billion this year and $52 billion in 2007. The bulk of the decline this year will take place in Russia where net inflows are projected to drop to $28 billion from nearly $39 billion last year. This reflects a large repayment of funds used to finance the purchase by Rosneft of a stake in Gazprom and the latter's acquisition of Sibneft. Net lending from commercial banks to Russia could fall to $25 billion in 2007. In the Asia/Pacific region, net commercial bank lending is expected to be $32 billion this year, down from a nine-year high of more than $46 billion in 2005. A further decline in net lending to about $23 billion is forecast for 2007.
Official Creditors: The IIF noted that International financial institutions (IFIs) as a creditor group are likely to receive net repayments in 2006 of $23 billion with Argentina and Mexico accounting for more than three-fourths of all repayments. The Africa/Middle East region is the only region expected to obtain net lending from IFIs this year. In 2007, net repayments to IFIs from emerging market countries are forecast to shrink to $4.4 billion.
Emily Vogl, Frank Vogl