The Institute for International Finance (IIF) forecasts net private capital inflows to emerging markets this year will be $165 billion (about Rs8 trillion), just 18% of the nearly $1 trillion seen in 2007.
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Countries with big debt loads could face default unless they have huge reserves. But China and those that generate capital domestically should be in better shape.
The decline in emerging market funds inflows, at 5.8% of their combined gross domestic product (GDP), is nearly double the declines of the early 1980s and the late 1990s. It will hit economies that depend heavily on bank debt—IIF expects the $167 billion inflow from banks in 2008 to reverse this year.
In bond markets, the massive borrowings by developed-world governments will crowd out lower-rated emerging markets credits. On the other hand, the equity market outflow of 2008 should almost cease while direct investment, generally a more stable funding source, should continue at an only modestly reduced level.
That has implications for particular countries. Emerging Europe should see the largest decline in private funds inflows, from 13% of GDP to 1%. Since much of the region runs double-digit balance of payments deficits, a major financing crunch is likely. In this respect, the Baltic states, relatively friendly to foreign direct investment, should fare better than the less receptive Romania and Bulgaria.
Capital crisis: A meat processing plant in China’s Shandong province. With little foreign debt and huge domestic savings, the country should have little trouble with capital, despite a slowdown. Adam Dean / Bloomberg
In Latin America, meanwhile, Brazil has a strong domestic savings base and generally welcomes foreign investors. It should do fine in spite of its debt burden. Conversely, countries such as Mexico, with weaker domestic savings and a trickier environment for outside investors, may find the going harder.
China, with little foreign debt and huge domestic savings, should have little trouble with capital, despite a slowdown in economic growth. On the other hand, India could have a difficult year, with substantial foreign debt and a profligate government offsetting its high domestic savings.
As Argentina and emerging Europe showed, hostility to foreign direct investment and low domestic savings were of little importance compared with natural resources or cheap labour in 2003-07. For 2009, however, domestic savings and openness to foreign investment will be much more important factors for economic health.