Capital Flows to Developing World at Risk of Collapse

Wednesday, January 28, 2009

Capital flows to emerging markets are in danger of collapsing this year as the financial crisis in advanced economies risks choking off the supply of credit to the developing world, an association of large banks warned on Tuesday.

The Institute for International Finance forecasts net private sector capital flows to emerging markets will be no more than $165bn (?125bn, ?116bn) this year, less than half the $466bn inflow in 2008 and only one fifth of the amount sent in the peak year of 2007.

The figures underscore the impact the banking crisis and risk-averse investors are having on emerging market economies, one of the central issues at this year?s World Economic Forum in Davos, which starts on Wednesday.

Bill Rhodes, a senior Citigroup executive who is vice-chairman of the IIF, urged leading economies to co-operate with each other and the private sector to address the problem. ?This is a worldwide recession the like of which we have not seen since World War II,? he said. ?There is no one country or group of countries that can do this on its own. The only way to solve it is co-ordination across the board.?

Mr Rhodes also called on the International Monetary Fund to intensify its efforts to supply liquidity to emerging markets by extending the duration of the current facility from three months to more than a year. ?The IMF?s resources need to be expanded and its approaches modified to provide financing to emerging markets that have been caught in a crisis not of their making.?

The shortage of capital is particularly acute for companies that soon need to refinance debt.

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Source: Financial Times (link opens in a new window)