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'Asian crisis caused drop in capital flows'

The Asian financial crisis has led to a major decline in the net private capital flows to leading emerging markets in 1997 and may prompt a moderate further decline this year, marking the first major retrenchment of capital flows by international investors to emerging markets this decade, says the Institute of International Finance.

The IIF, the global association of financial institutions with over 280 members, estimated that total net private capital flows to the 29 leading emerging market economies in 1997 totalled $199.6 billion, down from the record total of $295.2 billion in 1996. The IIF projected that the 1998 total will be around 171.5 billion dollars.

In its new report, capital flows to emerging markets, the institute stressed that net private flows into the five economies most affected by the Asian crisis (Indonesia, Philippines, Malaysia, South Korea and Thailand) fell from $93 billion in 1996 to an outflow of $12 billion dollars in 1997. However, flows to the other leading emerging market economies, including others in Asia, rose in 1997 to 212 billion dollars from 202 billion dollars.

Dr Georges Blum, chairman of IIF, noted at a press conference in Zurich, Switzerland, today: ''The crisis in Asia has certainly had a major impact on flows to the most seriously affected countries. However, in 1997, it is remarkable that in these circumstances flows to all other major emerging markets actually increased, demonstrating that contagion in flows has been limited.''

He added: ''Particularly noteworthy on the positive side are the developments that we are seeing with regard to equity flows. These reached a record volume in 1997, despite the Asian turmoil, and a similar volume is likely in 1998.''

Equity flows accounted for around 65 per cent of all net private flows last year, with the bulk of this attributable to foreign direct investment, ''which indicates a continuing strong interest in these countries by international businesses,'' said Dr Blum.

The IIF estimated that, largely because of the Asian crisis, official capital flows rose to close to $30 billion in 1997, from just $3 billion in 1996 and that a further $30 billion of such flows are likely in 1998. The institute noted that commitments for official international support totalling over $100 billion have been mobilised for Indonesia, South Korea and Thailand.

On the private creditor side, the IIF estimated a decline in net flows of around $100 billion in 1997 to a total of $88 billion and projected a further decline to a total of roughly $40 billion for 1998. The fall seen last year was due to reductions in net new flows from banks to emerging market economies, while the 1998 projections involve an expectation of a significant decline in new bond issues. The total 1998 net funds from non-bank private creditors are expected to be $40 billion after $70 billion in 1997.

''Charies Dallara and I stated last March at the Inter-American Development Bank meeting in Barcelona, our concerns about very high levels of liquidity and steady declines in spreads in 1995-96, several times during 1997 the IIF urged lenders and investors to undertake thorough research and not to rely on credit ratings,'' said William R Rhodes, vice-chairman of the IIF. ''Subsequent events show that those concerns were correct.''

Underlying the capital flows forecasts are a set of IIF estimates and projections for the leading emerging market economies. As a group their real gross domestic product in 1998 is forecast to decline to 2.9 per cent from 4.9 in the last two years. The Asian-Pacific emerging economies are expected to grow by 2.8 per cent this year, which is the lowest level seen in a generation and compares with 6.2 growth and 8.00 per cent growth in 1997 and 1998 respectively. Growth in Latin America is forecast to decline to 3.3 this year, after 5.1 per cent in 1997.

At the same time, the exchange rate changes and other major adjustments in Asia are expected to contribute to the Asia-Pacific countries as a group recording a current account surplus of possibly $28 billion this year, following a deficit of around $2.4 dollars in 1997. This will contribute to a rebuilding in the foreign exchange reserves of these countries.

With regard to the outlook for capital flows in 1998, the IIF managing director Charies Dallara noted that: ''There are major uncertainties surrounding the forecast for flows to emerging markets in 1998. Assuming the situation in Asia stabilises, we expect sizable net private flows to emerging markets globally, although at $170 billion this total is likely to be moderately lower than in 1997. Should some Asian economies not stabilise, net flows will be sharply lower. On the whole, however, we foresee strong flows to equity to emerging markets outside Asia and a gradual rebound in both bank lending and capital market lending. Discrimination and sound risk management by investors and lenders will, however, be more important than ever.''

EARLIER REPORT:
November saw outflows exceed inflows, for the first time after liberalisation

UNI