Private capital flows to emerging markets rose to a record net $358 billion in 2005, an increase of $40 billion from a year earlier and well above the previous record of $324 billion in 1996, according to the Washington, DC-based Institute of International Finance. While such flows are expected to continue to be strong in 2006, the net total likely will slip to about $322 billion, the IIF says.
Favorable global growth, high levels of liquidity and the search for yield by investors supported the 2005 flows, the institute says. Pre-financing of debt coming due in 2006 by many emerging-market countries contributed to the advance. Given the pre-financing, the IIF anticipates that net new bond flows from non-bank investors will decline to about $68 billion this year from $83 billion in 2005.
Josef Ackermann, IIF chairman, says emerging-market countries have improved economic policy management in recent years, which has led to greater growth, lower inflation and lower ratios of public debt to gross domestic product. William Rhodes, the IIF’s first vice chairman, says investors will need to be especially cautious and pay close attention to economic fundamentals as the global liquidity environment changes and interest rates potentially rise.