Athens: Capital flows to emerging markets are set to reach near-record levels this year, as long as global growth stays robust, led by takeover activity and commodity investment, a report said.
The Institute of International Finance (IIF), which represents major commercial and investment banks, said it estimates a net $545 billion (Rs22.35 trillion) will be invested in emerging markets this year, more than double the amount recorded in 2003, and just below last year’s record of $553 billion.
Investment has regained strong momentum after a brief retrenchment this spring, caused by concerns about the US subprime mortgage market. Growth should continue as long as the global economy remains strong, risk appetite high and money plentiful, the IIF said.
To protect themselves against possible market turbulence, emerging countries should pursue sound policies, structural reforms and a deepening of domestic capital markets, the IIF recommended.
Seizing opportunity: File picture of Essar Group vice-chairman Ravikant Ruia (left) and Vodafone Group CEO Arun Sarin. Vodafone said in March it was buying telco Hutchison Essar for $10.9 billion, the largest foreign acquisition of an Indian company. Takeovers are driving overseas investment into emerging markets.
“While none of these risks are necessarily destined to surface, policymakers would do well to firmly adhere to prudent macroeconomic policies and reinvigorate structural reforms,” it said.
The report, released at the IIF’s spring meeting in Athens, also cautioned that corporate debt ratings for recent issues have started to go down, which may point to possible weaknesses ahead.
The strong external position of many governments may mask potential vulnerability of corporations and banks that have increased borrowing substantially in the past few years, it said.
“Although the overall credit rating of corporate debt issued to date is nearly the same as that of sovereign issuance, the rating of more recent issuance has been going down.”
The IIF report said net direct investment is projected to rise to $194 billion from $167 billion last year, driven by mergers and acquisitions and strong demand for commodities. Emerging Asia is the biggest destination, led by China, which IIF estimates will attract $58 billion in net inflows this year. Turkey will likely see a second year of strong flows of nearly $17 billion as its privatization proceeds despite ongoing political tensions, the report said.
The IIF forecast that net lending from commercial banks will fall to $173 billion this year from a record high of $198 billion in 2006.
The repayment of short-term bank loans for merger and acquisitions will offset strong overall bank lending this year particularly to emerging Europe, it said.
The report said emerging market countries such as Brazil, Chile, China, India and Russia have become a source of financing in recent years as they invest overseas for general development and to meet corporate goals.