Capital Flows to Emerging Markets Soar

Manila Bulletin, June 4, 2007 | Go to article overview

Capital Flows to Emerging Markets Soar


Byline: STELLA DAWSON

ATHENS, June 3 (Reuters) -- 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 estimated a net $ 545 billion 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 because of 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, which represents major commercial and investment banks, 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.

"While none of these risks are necessarily destined to surface, policy makers 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 also identified the following trends:

--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.

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