Capital inflows into emerging markets to ease up in 2007, says IIF

By Reshmi Basu

New York, Jan. 18 - Total net private capital flows into emerging markets are expected to ease in 2007 as compared to last year, reported the Institute of International Finance, a global association of financial services firms.

In 2006, total flows stood at $502 billion, falling just below the record set in 2005 of $509 billion. However, 2007 is expected to see somewhat more muted flows due to the anticipated moderation in world growth, including the expected slowdown in the United States.

IIF projected this year's volume to be around $470 billion. And from a geographical perspective, regions across the emerging market universe will also see less net private capital flows as compared to last year.

IIF projected that emerging Europe will receive $214 billion in capital, down from $218 billion in 2006. Asia will see a projected $169 billion, compared with $197 billion last year.

Flows into Latin America will be around $55 billion, lower than the $46 billion witnessed in 2006. And the Africa/Middle East region is expected to see $31 billion, a decline from $40 billion in the previous year.

Meanwhile the baseline forecast by IIF does not anticipate any significant correction in emerging market asset prices this year, barring any major shocks.

On Dec. 28, the JP Morgan EMBI Global index touched an all-time low of 170 basis points versus U.S. Treasuries. And since then, the EMBI index has been trading at a fraction above that level.

Furthermore, the IIF predicted that sovereign bond spreads should not "experience any prolonged periods of significant widening from the range that prevailed in the past few months in light of a limited supply of new bonds coming on the market."

Additionally, emerging market corporate bond spreads could move higher as "further building of leverage in their balance sheets and likely signs of a rise in default rates raise risk sensitivity among investors."

Improvements in fundamentals and favorable global conditions have helped fuel the stellar performance of the asset class. But the IIF also noted that the increasing number of institutional investors, including hedge funds and pension funds, have also bolstered the market's performance.

"The emergence and now deepening of local markets with the increased participation of non-resident investors, the introduction of new types of securities, particularly derivatives, and asset securitization into country financing programs; and an extension in maturities have left emerging market debt more manageable than at any other previous point in the history of the market," noted the IIF in its report.

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