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Emerging markets, notably in Asia, are expected to receive US$276 billion in private capital this year, according to the Washington-based Institute of International Finance (IIF). This follows last year's $279 billion - the highest level since 1997, according to IIF in its annual report on capital flows, published recently.
China and India will continue to be the major recipients of direct foreign investment (FDI), while
China will attract a continuing inflow of portfolio investments in its equities market. However, last year's interest in Indian and Korean equities has waned, and these two countries are expected to drop down the list of priorities this year. New FDI commitments reached $253 billion last year - up from $115 billion in 2003. The large pipeline of new commitments and heightened global corporate enthusiasm for China suggest that new inflows of FDI should rise from $59 billion last year to $65 billion in 2005.
Efforts by Chinese authorities to slow down the economy have done little to deter investors. Indeed, expectations for a revaluation of the currency seem to be prompting foreign investors to accelerate funding for their investment facilities. As a consequence, China is projected to account for more than 85 per cent of the $75 billion in direct investment expected to flow into the region this year. The IIF says growth in China is likely to slow marginally from last year's 9 per cent as policies remain focused on preventing the economy from overheating.
India will be the second-largest recipient of direct investment in the region, with net inflows this year of $4.5 billion. Real gross domestic product (GDP) in India is projected to pick up slightly from last year's pace to reach 6.5 per cent in 2005, supported by a round of public fixed investment. In the rest of Asia, real GDP growth is likely to be in the range of 4.5-6 per cent .
South Korea, however, is likely to be the only country in the region to experience net outflows this year, amounting to $1 billion. This would be the third time in the last four years that the Koreans have experienced net outflows of direct investment. One reason is rising investment abroad by Korean companies as Korea moves from an emerging market to a mature economy, says the report. In Korea, with consumption and investment expected to remain subdued, real GDP growth next year is likely to decelerate to 3.5 per cent from 4.5 per cent in 2004.
Just as in FDI, the Asia Pacific region was the top destination for portfolio equity investment in 2004. This year, flows are expected to fall back slightly to about $30 billion from $31 billion in 2004. The fall will be felt by stock markets in India and South Korea. But China remains on the radar screen in part because of the upcoming initial public offerings of the Bank of China and Construction Bank. This is in spite of lingering concerns about corporate governance. The IIF suggests that China could receive new inflows of portfolio equity, likely to increase this year to $15 billion from $12 billion.
Net commercial bank lending to the Asia Pacific is expected to decline to less than $12 billion this year from more than $33 billion in 2004. China will account for a large portion of the decline in net lending, reflecting administrative measures taken by authorities to impose quotas on foreign banks' overseas borrowing. In Korea, rising international interest rates and sluggish investment are likely to reduce net commercial bank lending to less than $2 billion in 2005 - down from nearly $6 billion last year. India is the only country in the region expected to see an increase in net lending this year, as investment demand and external trade activity remain strong.
According to some experts, the large expansion in economic activity across the world has generated unanticipated inflationary pressures, especially in primary products and steel. This may force tighter monetary policies and higher interest rates in advanced economies, leading to reallocation of international portfolios and volatility in the pattern of capital flows to emerging markets. But most hold that emerging markets are not likely to experience any major meltdown in 2005 though trouble may be brewing in the long run for some that haven't carried out the necessary structural adjustments and reduced debt.
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Asia Pulse/Asia Today
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