Emerging Market Investment to Climb to $311 Billion (Update2)
Emerging Market Investment to Climb to $311 Billion
March 31 (Bloomberg) -- Net investment in emerging markets will keep rising this year, helped by higher flows to China and increased bond sales, according to a group that represents more than 300 international banks.
Private investment in Brazil, Turkey and other developing nations will climb to $311 billion in 2005 from $303 billion in 2004, the highest since the 1997 Asian financial crisis, the Institute of International Finance said today at a conference in Madrid. In January, the trade group forecast investment would be $279 billion in 2004, falling to $276 billion this year.
``China, Mexico and new European Union members' are among the countries that will see the biggest increases, said William R. Rhodes, IIF first vice chairman and senior vice chairman of Citigroup Inc., at the meeting. He added that slower global growth and possible higher interest rates means ``the most vulnerable economies confront significant challenges.'
Economic growth in emerging markets from Latin America to Asia is outpacing that in most developed nations. Brazil's economy expanded 5.2 percent in 2004, the fastest pace in a decade, while Turkey's may have surged 9 percent, according to government estimates. By comparison, the U.S. economy grew 3.9 percent and the euro region's expanded 2 percent, according to Eurostat, the European Community's statistics office.
China Investment
Direct investment in China will rise to $65 billion, up from $59 billion last year and almost half of the total net increase of $150 billion forecast for 2005, IIF officials said.
Debt refinancing in Poland and Russia ``will account for a great bulk of the increase' in new bond investment as nations seek to raise money before interest rates rise, said IIF Chief Economist Yusuke Horiguchi.
Higher investment in 2005 probably is masking a tougher environment, and that nations that borrowed too much will be hurt by higher interest rates and slower growth than in 2005, IIF officials said.
The extra yield, or spread, investors require to hold emerging market bonds instead of U.S. Treasuries widened to 395 basis points on March 28 from a five-year low of 330 basis points on March 8, according to JPMorgan Chase & Co.'s EMBI+ index. A basis point is 0.01 percentage point. Wider spreads indicate investors see more risk in holding an issuer's debt.
`Turning Point?'
``The recent rise in spreads was quite broad' and didn't affect just a few countries, said Charles Dallara, managing director of IIF. ``We are probably at a turning point where the environment for emerging markets is turning more challenging.'
Emerging market bonds, stocks and currencies fell this month as investors shunned riskier assets on concern rising oil prices will stoke inflation, prompting the U.S. Federal Reserve to boost the size of interest rate increases.
Emerging market equity funds last week had their worst week since May 2004, with net outflows of $761.9 million, EmergingPortfolio.com reported.
Total portfolio investment will fall in 2005 to $36.7 billion from $38.5 billion, an 11-year high, with the Asia/Pacific region accounting for more than 90 percent of equity investments, the IFF said. Stock sales probably will match the $33 billion of 2004, the highest total in a decade.
IIF Chairman Josef Ackermann, the chief executive officer of Deutsche Bank AG, said international finance ministers meeting next month under the aegis of the International Monetary Fund should accept the group's proposals for a ``code of conduct' regulating negotiations between investors and debtor nations.
``Now, when capital flows are robust, we must strengthen the system,' Ackermann said. ``It would be a mistake to be complacent about the architecture of the system.'
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