Private Investment & Capital Flows to Emerging Markets to Decline to $469B in 2007

Private investment from developed countries into 30 emerging markets, including China, India, Mexico and Brazil, would decline to $469 billion in 2007 from $502 billion in 2006 and a record level of $509 billion in 2005, according to The Institute of International Finance, whose members include 360 companies from 60 countries (reports AP).

The group's estimate of $469 billion for 2007, if achieved, would be the third-highest level recorded by the IIF. 

The IIF forecasts that 2007 net direct investment could set a new high level of $211 billion following $185 billion in 2006.  Last year witnessed record high emerging market share prices accompanied by net portfolio equity inflows of close to $70 billion, after $56 billion in 2005.

Private investment includes direct foreign investment (FDI), which is the purchase of physical assets and corporations; portfolio equity investment, or the purchase of stock; commercial bank lending; and nonbank private lending, which is mostly the purchase of bonds issued by companies in emerging countries, according to the IIF.

Other Highlights from IIF Report:

  • Net commercial bank flows in 2006 exceeded $140 billion for the second year in a row and it projected a lower 2007 volume at around $100 billion.
  • Net direct equity investment in Asia is projected to hold at $76 billion, down from the peak of $89 billion in 2005. 
  • Inflows of direct investment to China peaked at $68 billion in 2005, and the report suggests that net inflows could amount to $55 billion this year the same as in 2006. 
  • Net direct investment into India is rising and likely to reach $8 billion this year after $6.5 billion in 2006.
  • The projected capital flows for 2007 would be more than double the roughly $200 billion of private investment in 2000
  • Net commercial banks lending is projected to exceed $100 billion in 2007, the fifth consecutive year of positive flows albeit down from the record level of $143 billion last year.

The IIF reported that foreign exchange reserves of the leading 30 emerging market economies that are covered in the new report rose by $536 billion in 2006, after a gain of $440 billion in 2005. A further rise in reserves of $506 billion is seen as likely in 2007.

The IIF projected that the U.S. economy would grow at a 2.75% rate, down from 3.25% in 2006, while Europe and Japan would each grow at a 2.25% rate. The 30 emerging markets as a group would grow at 6.4% in 2007, down from 7% in 2006. 

The group attributed the growth in investment flows in recent years to several factors, including improved economic policies in the developing countries and the increased participation of hedge funds and pension funds in emerging market investment.

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