Reuters: Weak dollar sends capital to emerging markets -IIF

Weak dollar sends capital to emerging markets -IIF
Wed Jan 19, 2005 07:40 PM ET
(Adds comments on bubble, U.S. current account in paragraphs 12, 13)

By Lesley Wroughton

WASHINGTON, Jan 19 (Reuters) - Net private capital flows to emerging markets surged by 32 percent last year to $279 billion, the highest level since 1997, a global association of financial institutions said on Wednesday.

The Institute of International Finance said the higher flows were mainly due to a weaker U.S. dollar.

The Washington-based IIF, whose members include most of the world's largest commercial and investment banks, said the rise in 2004 flows was $53 billion higher than its October forecast of $226 billion.

Nearly 60 percent of that extra $53 billion went to China, while Russia accounted for 25 percent.

"The sharp downward movement of the dollar, particularly in October, may have been (the catalyst) in the pickup in flows," Charles Dallara, IIF managing director told a news conference.

Although global growth was likely to slow in 2005, the IIF said it expected the pace of capital flow to emerging markets to continue in the first months of this year. It revised up its 2005 projections for capital flows to emerging markets to $276 billion from an October projection of $230 billion.

The group said Asia is expected to capture about 46 percent of the total net flows for 2005, down from 52 percent in 2004.

Meanwhile, flows to Latin America could exceed $39 billion in 2005, up from $26 billion last year, the IIF noted.

Capital to "emerging Europe" should increase slightly this year to 37 percent of total flows, the IIF said, amid a pickup in interest in Turkey, where flows are the second highest in the region after Russia.

Private flows to Africa and the Middle East are likely to remain small at about 4 percent of the total.

Dallara cautioned, however, there were downside risks to the projections, including a sharper-than-expected rise in U.S. interest rates that could be triggered by shifts in inflation, disruptive currency movements, concerns over global imbalances, and political uncertainty.

He said the surge in private capital to emerging markets "could well be a dimension of a bubble," but noted that 2005 would likely be more challenging for policymakers in developing countries and for investors, amid a widening U.S. current account deficit.

The current account deficit, which is nearly 6 percent of U.S. GDP, is the broadest measure of trade since its includes investment flows.

IIF chief economist Yusuke Horiguchi, a former International Monetary Fund official, said the U.S. Federal Reserve was expected to keep raising interest rates at a measured pace through 2006 toward a neutral range of 3.5 to 4 percent.

Horiguchi said he was more comfortable with a neutral stance of 4 percent by the middle of 2006.

A neutral federal funds rate is defined as one that neither hinders growth by choking off credit nor spurs inflation by failing to keep prices in check.

Federal Reserve chairman Alan Greenspan has declined to specify a precise level for a neutral rate, saying only that Fed policy-makers will know it when they reach a neutral rate.

The IIF forecast that the U.S. economy would grow 3.4 percent in 2005.

It also forecast gross domestic product growth for emerging markets of 5.4 percent in 2005, one percentage point lower than in 2004.

© Reuters 2005. All Rights Reserved.

Prudent Investor says

This is what I’ve been saying all along. Well anyway a rather oxymoronic comment in this news report is that the surge in private to emerging markets ‘could be well a dimension of a bubble’. If the weak dollar is what 'mainly' prompts private capital to emerging markets could this mean the dollar’s fall is likewise exaggerated or ‘bubbly’ in context? Amazing disconnect, huh?