June 01, 2011Capital for emerging world to top $1 trillion: IIF
Private capital flows to emerging markets should top $1.0 trillion this year, fuelling growth in the global economy, an international banking association said Wednesday.
But the Institute of International Finance warned against countries using capital controls to manage those flows, saying they should instead use other methods to fight inflation, including allowing their currencies to rise.
The IIF said net private capital flows to 30 key emerging market economies were likely to reach $1.041 trillion this year and rise to $1.056 trillion in 2012.
Capital flows to those emerging economies had jumped about 55 percent in 2010, to roughly $990 billion, as the global economy pulled out of its 2009 recession.
The projected slower growth in capital flows came in the context of a mixed global economic recovery still benefiting from strong fundamentals in emerging economies, the IIF said.
"The high level of capital flows to emerging markets reflects the rising weight of these economies in the global economy and their very strong performance relative to the mature economies in recent years," said Charles Dallara, managing director of the Washington-based IIF.
"Overall, these inflows make a very positive contribution to global growth and it is important to note that approximately 40 percent of the total is accounted for by foreign direct investment."
The new estimates for 2011 and 2012 were both about $80 billion higher than the IIF's January projections, mainly due to upward revisions for China and Brazil, the association said in its report, "Capital Flows to Emerging Market Economies."
The IIF said that inflows to both emerging Asia and Latin America -- which had risen sharply in 2010 as their booming economies led the global recovery -- were set to fall modestly below that level this year and in 2012.
In the Middle East-Africa region, where a number of countries have been gripped by unrest and political turmoil, flows are expected to drop "significantly" below the 2010 level this year, but to recover next year.
The only regional gainer was emerging Europe, including Russia, Turkey and eastern European countries, which had suffered as capital inflows dried up in 2009 amid the global downturn, said the association grouping more than 430 financial services firms in over 70 countries.
However, Dallara warned that "inflationary pressures, rather than high capital inflows, is the largest threat to sustained growth in most emerging economies."
The financiers had sharp words for the International Monetary Fund's shift in April to endorsing capital controls for the first time, under certain limited conditions.
"The IMF's new stance risks encouraging greater use of capital controls before there is an international framework in place to regulate their use and ensure a level playing field across countries," the report said.
Philip Suttle, IIF deputy managing director and chief economist, said that in most cases strong capital flows and rising exchange rates simply came along with strong economic fundamentals, and were a necessary part of macroeconomic adjustment.
Capital controls, which have been introduced by Brazil and some other countries to counter heavy capital inflows, should be used with caution, the IIF said.
"Capital controls are a distraction from the main policy task of reducing aggregate credit growth and inflation," Suttle said.
Last month Angel Gurria, the head of the Organization for Economic Cooperation and Development which represents 34 advanced economies, declared that "capital controls should be seen as a last resort and only as a temporary solution."
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