The Institute of International Finance (IIF), the world’s only global association of financial institutions with 345 members headquartered in 60 countries, reported that private capital flows to emerging markets set a new record in 2005, reaching an all time high of $358 billion, a rise of $40 billion over 2004. The IIF notes that flows have finally surpassed their previous record of $324 billion set in 1996. Flows to the Africa/Middle East region doubled, yet remained under 8% of total flows to emerging markets.
Mr. Ibrahim S. Dabdoub, CEO of the National Bank of Kuwait and member of the IIF’s Board of Directors, said, “The strong flows of private capital into emerging markets have been driven by a number of factors. The continuing global economic expansion, alongside improved economic policy management put in place by national authorities, have led to greater growth, lower inflation and reductions in public debt levels relative to GDP. Furthermore, investors' appetite for emerging market assets have increased, which together with abundant international liquidity, have stimulated the flow of capital to these markets. ”
In the Africa/Middle East region (South Africa, Tunisia, Morocco, Egypt and Algeria), the IIF estimates real economic growth at 4.8% in 2005, up from 4.5% and 4.3% in 2004 and 2003, respectively, and the region’s current account balance at $12.6 billion (2.5% of GDP), compared to $6.3 billion the previous year. Reserve accumulation is expected to have topped $33 billion, up from $19 billion a year earlier.
Mr. Dabdoub explained that “the sharp run-up in reserves in the region in 2005 benefited from high oil prices in hydrocarbon-based economies as well as the strength in equity flows, both direct and portfolio investment.” The IIF reports that private flows to the region more than doubled this year to exceed $28 billion. This is equivalent to 8% of total flows to emerging markets compared to less than 3% in previous years.
Mr. Dabdoub added that “while moderating somewhat, these trends are likely to continue in 2006. Flows to the Africa/Middle East region are expected to amount to 7% of total flows, with Egypt and South Africa accounting for almost two-thirds of this.” The IIF forecasts the region is the only one where growth is expected to accelerate in 2006 to 5.4 percent, with all countries in the region projected to experience a pick up in economic activity. According to IIF estimates, the regional current account surplus will exceed 3 percent of GDP in 2006 and reserve accumulation will climb to a record $35 billion. Net private capital flows to the region are also expected to remain high compared to previous years, yet they will stay below this year’s record. Net direct equity investments to both Algeria and Egypt will remain robust, although in the case of Egypt, the IIF expects some slowdown as the pace of liberalization decelerates. The IIF anticipates that net portfolio equity investments to Egypt are likely to break another record while, in other countries, they are expected to decline. It also expects that the region will see net inflows from official creditors for the first time in a decade.
Mr. Dabdoub emphasized that “the global economic setting and emerging markets’ fundamentals remain the key determinants of private capital flows to emerging markets. While these appear to be conducive at this time to continued high overall volumes, there are a number of risks, mainly: the persistence of tight fundamentals in oil markets and large global current account imbalances”. Mr. Dabdoub concluded that “the underlying strains in the global economy beneath its benign surface at this moment make it important for emerging market governments to pursue policies that sustain market confidence”.
Since its inception over 20 years ago, the IIF has grown from an institution comprising 37 founding member banks to one with a membership of more than 345 financial institutions, including the 65 leading financial institutions in the Middle East region. The Institute addresses a broad array of issues of importance to its members, through its economic research, regulatory advocacy, and policy formulation. In addition, IIF meetings and events provide exceptional opportunities for networking and assessing the global issues and challenges that are faced by the financial community. In 2005, the Institute was actively engaged with the Basel committee on Basel II standards, representing the views of emerging market members as well as members of industrialized countries. It also worked diligently to promote convergence of regulatory capital and accounting standards and to advance the implementation of a set of guidelines aimed at reducing significant gaps that remain in the area of crisis preventions and crisis management.
