Investors must "carefully evaluate risks" in emerging markets as global liquidity begins to tighten, warned Bill Rhodes, Citigroup senior vice chairman and first vice chairman of the Institute of International Finance yesterday. His colleague, IIF Chief Economist Yusuke Horiguchi stressed the danger of investors "going overboard" in emerging markets, while the threat of "sudden changes" in sentiment among bond investors was also flagged.
"Private capital flows to emerging markets are moving to levels that have not been seen since before the Asian crisis of 1997/98," said Rhodes at a press briefing given at the IIF yesterday. This is taking place against a background of rapid growth in these markets, he noted. The IIF is forecasting 6.2% real GDP growth this year in the 29 emerging market economies it monitors, compared with 5% last year. Growth will be high both in Asia and Latin America.
However IIF officials suggested that contracting spreads on emerging market bonds signal danger. "We have concerns about the over-compression of spreads," said Horiguchi, stressing that the IFF does not expect to see a repeat of the emerging markets crises of the late 1990s. Risk-management techniques among investors have become "more sophisticated" since those crises, added IIF and Deutsche Bank Chairman Joseph Ackermann.
Overall net private capital flows to all emerging markets are likely to reach $226 billion this year, up from $213 billion in 2003, reported the IIF which forecasts a further rise next year to around $229 billion. Most of this stems from a rebound in direct equity investment from the eight-year low reached in 2003. This foreign direct investment will account for one-half of all private capital flows to emerging markets in 2004 and 2005, the IIF said.
Commercial bank net lending to emerging markets is predicted to exceed $31 billion in 2004. Meanwhile, net flows of investment into emerging bond markets are set to decline slightly to $55 billion this year.