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Global banks to raise aid to emerging markets: benefits to elude India

R C Murthy in Washington

Net international private capital flows to 29 major emerging markets are to rise modestly to $155 billion after two years of stagnation at $136 billion, according to the Institute of International Finance.

The IIF is an association of top international banks like Citibank, Bank of America, Fuji and Bank of Tokyo and Mitsubishi.

But such internatiional capital flows are expected to bypass India. The capital flows to South Asia would fall, according to the report, to $6.4 billion next year from $7.4 billion this year. The stagnation, as the IIF staff calls it, is due to continuing uncertainties, though the countries in the region strained to welcome foreign capital.

The IIF prognosis is not a happy augury for the new government that will be in saddle at New Delhi next month. The Bharatiya Janata Party and Congress have promised to accelerate economic reforms and welcome private capital to give a fillip to development.

In fact, economic development has taken a back seat in India this year. After post-Pokhran II sanctions imposed last year, the Aid-India Club, rechristened the India Development Forum, has not met at all and no aid, bilateral or otherwise, is in the pipeline.

The bulk of world additional capital flows will go to the East Asian economies that are emerging from the 1997 Asian contagian. It is a long way to go to match the peak of $334 billion of 1996. In 1997, the net private flows were $265 billion.

Probably, the peak will never be reached again in the coming years as China, a capital guzzler, is projected to attract less capital in future.

The stagnatiion this year at $135.5 billion is attributed to a "higher degree of aversion" to the risks associated with lending to emerging markets on the part of commercial banks and institutional investors. Also, in some countries demand for capital was weak.

International banks and capital exporters are focusing now on Latin America, where countries are defaulting on repayments against bonds issued some 10 years ago as part of a compromise for repayments due against petro-dollar loans recycled to them.

The creditors are worried because in their perception the group of seven industrial countries and the IMF are encouraging the default. The creditors want to discuss the roll-over on a case-by-case basis while the IMF and G-7 are encouraging a package solution.

As a result of these fresh uncertainties, the projects for capital flows next year are in jeopardy.

The hope is that the setback to capital flows to Latin America will be compensated by accelerated flows to Asia that is recovering fast from the contagion.

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