Capital inflows to emerging markets rebound: IIF

Tue Jan 26, 2010 9:31am EST
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By Sven Egenter

ZURICH (Reuters) - Private capital inflows to emerging markets are set to soar by two thirds this year as countries like Brazil and China drive global recovery, the Institute of International Finance (IIF) said on Tuesday.

Emerging markets seemed to be aware of risks from hot money -- short-term, yield-chasing cash inflows, the global banking association said. Mature economies need to come up with credible plans to tackle spiraling debt and liquidity, it said.

"We face a situation that in my more than 50 years in banking is without precedent," said William Rhodes, First Vice Chairman of the IIF's Board said at a media conference in Zurich on the eve of the World Economic Forum meeting in Davos.

"We are seeing rising levels of private capital flows moving into emerging market economies not only because these are demonstrably good places to invest in, but also because their growth prospects look decidedly more favorable than the rather meager ones of the mature economies," he said. The IIF is an association of financial services firms with over 380 members worldwide.

Rhodes, who is also senior vice chairman at Citigroup (C.N: Quote), said hot money flows, as well as rising inflationary pressures, were posing a tough challenge to governments and central banks in some emerging countries.

The IIF noted a significant risk of renewed excesses, which needed to be monitored by investors and policymakers, though Rhodes struck a note of confidence: "I believe that there is an acute sensitivity to this in key capitals."

Central bankers have also warned that huge capital flows into emerging market assets may create new bubbles and add fresh instability to the global financial system.

G20 ACTION   Continued...