Private capital flows to emerging markets are projected to reach a record high of $345 billion this year as global financial liquidity also continues at record high levels, the Institute of International Finance (IIF) announced yesterday.
This year's flows will surpass the previous record of $323 billion, reached in 1996. While flows are expected to moderate to $318 billion in 2006, they remain very buoyant, the IIF said.
'The continued robustness in flows is being supported by a further pickup in direct investment [in emerging markets], and a record pace of bond issuance as sovereign and private borrowers endeavour to stay ahead of the curve before the tightening policy interest rates cycle starts to hit bond markets visibly,' the Institute noted.
Since publishing its last report on capital flows in March this year, the IIF has revised upwards it estimate for 2005 from $311 billion to $345 billion, largely because if a jump in commercial bank lending to emerging markets with most of this going to Asia. Estimates of flows into emerging market bonds have also been revised upwards as borrowers have taken advantage of low spreads to pre-finance obligations that come due next year.
Direct investment is projected to account for 43% all private capital flows to emerging markets this year, and China will take about two-thirds of this, the IIF said. Commercial bank lending is meanwhile projected to reach a nine-year high of $63 billion in 2005 before slowing to $59 billion next year.
European emerging markets are expected to be the chief borrowers from banks, while net lending to Latin America should turn positive for the first time since 2000.
Non-bank flows to emerging markets (mainly bonds) are projected to reach an all-time high of $90 billion, although net flows are expected to recede next year to $76 billion, largely because of reduced borrowing by countries in emerging Europe. A major reason for this is that Poland used the bond market heavily this year to finance large chunks of official debt due to Paris Club members.
By region, Asia is expected to absorb 42% of all private capital flows to emerging markets this year - down from 52% in 2004. Emerging European markets will account for a further 38% of total net flows while Latin AmericaÕs share will remain in the range of 13-16% and Africa and the Middle East will account for 4-6%, the IIF said. AsiaÕs share is projected to rise again next year while Europe's share declines.