While net private capital flows to the emerging markets this year are expected to all but match the record $400 billion achieved in 2005, Latin America won’t see much of that activity at all, according to the IIF.
The institute’s update on capital flows to emerging market economies, presented at the Spring Membership meeting in Zurich, estimates that net capital flows to Latin America will decline to around $28 billion in 2006, down from $50 billion last year and the lowest figure recorded for the last four years.
While net equity flows are likely to be only moderately lower – at around $43 billion as against $47 billion last year – net nonblank creditor flows are expected to switch from an inflow of $4 billion in 2005 to an outflow of nearly $15 billion on the back of a number of substantial debt buyback programmes. Brazil is expected to account for the bulk of outflows ($15 billion), with Mexico and Venezuela combining to account for another $7 billion.
The IIF expects the regions real GDP growth rate to improve from 4% to 4.2% in 2006, but foresees a weakening trade surplus and a decline in the current account surplus across the region to under 1% of GDP. Reserve accumulation will fall to around $12 billion leading to a decline in reserves in relation to import cover for a third consecutive year.
Roberto Setubal, vice chairman of the IIF and president of Banco Itau, believes that Latin American governments have done much to strengthen their economies, but that much remains to be done on the reform agenda.
Notes Setubal: “The substantial private capital flows to emerging markets does, to a considerable degree, reflect positive economic performance. In my own country of Brazil, for example, inflation has been cut, significant growth is being seen and the external position has been strengthened. In Latin America overall, the ratio of external debt to exports over the last five years has fallen to 112% from 200%, which is a significant achievement. Nevertheless, our meetings here [IIF Spring Membership meeting in Zurich] and in Brazil will also highlight how important it is that national authorities remain vigilant in pursuing sound economic policies and that they press ahead with structural reforms.”