(adds comments on protectionism)
By Sven Egenter
ZURICH, Jan 27 (Reuters) - Private capital flows to emerging
markets are set to drop by nearly two thirds in 2009 as the
global economy makes its most extreme downturn since World War
Two, the Institute of International Finance said on Tuesday.
Industrialised and emerging countries should tackle
potential refinancing problems head on in the coming weeks and
the International Monetary Fund's (IMF) resources to help
emerging markets should be expanded, the global banking
association said.
"The prospective 2009 declines in private capital flows
raise major questions about the financing viability of a number
of emerging market countries which are experiencing severe
economic strains," said William Rhodes, First Vice Chairman of
the IIF's board, at a media conference in Zurich.
The IIF is an association of financial services firms with
400 members worldwide.
Emerging market leaders needed to be vigilant and the IMF
should back up their efforts, said Rhodes, who also is Chief
Executive Officer of Citibank <C.N>.
"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," Rhodes said.
China and the gulf states were among the countries that
should be called upon for the necessary funding, he said.
IIF managing director Charles Dallara urged industrialised
countries not to fall for the temptation of protectionism, not
only when it came to trade.
Governments' plans in the United States and Europe to
support troubled banks also were bearing signs of protectionism.
"I think it could prove very short-sighted if authorities
attached too much "let's-keep-it-at-home" mentality to the
capital and the credit," he said.
Governments should ensure that injections of capital and
other support mechanisms were not intended to inhibit the flow
of capital and credit across boarders, Dallara said.
The IIF expects private capital inflows to emerging markets
to drop to $165 billion in 2009, down from $466 billion in 2008
and a record of $929 billion in 2007.
The institute forecast the global economy to shrink 1.1
percent in 2009 after a 2.0 percent expansion last year,
slashing its December forecast of a 0.4 percent output decline.
The IIF expects output in the three largest major economies
-- the United States, the euro zone and Japan -- to drop by 2.1
percent while emerging markets are expected to grow by 2.7
percent, only half the pace of 2008.
Growth in China is seen slowing to 6.5 percent, the IIF
said. In Latin America, Mexico faces a recession and overall
growth in the region will slow to below 1 percent.
"Recession will be more widespread across Emerging Europe
and the region will be the weakest among emerging economies,"
the IIF said.
CROWDED OUT
Many of the leading emerging economies were in much better
shape than in previous crisis, but policymakers needed to take
actions in time, Rhodes said.
The IIF said private sector borrowers face at least $100
billion of repayment obligations on their market-based borrowing
that fall due in the first half of this year, of which they seem
able to issue not much more than half.
"Policymakers in both mature and emerging markets would be
well advised to address this refinancing problem head on in the
weeks and months ahead," said Philip Suttle, head of IIF
economic research.
Emerging market borrowers faced difficulties in rolling over
market-based debt under conditions where it is not just their
own prospects that have deteriorated, but also those of their
lenders, the IIF said.
In addition, they now faced the prospect of being "crowded
out" by the massive borrowing needs of G10 governments, it said.
The IIF expects emerging countries in Europe to see the
sharpest decline in net private capital flows, dropping to $30
billion from $254 billion in 2008.
The global banking crisis continued to throttle bank lending
to emerging markets, the IIF said, forecasting a net outflow of
$61 billion in bank lending compared with a net inflow of $167
billion in 2008.
Borrowers from emerging Europe will repay a net of $27
billion. Russia alone is expected to repay $49 billion net, the
IIF said. For emerging Asia, the IIF forecasts repayments to
banks of $25 billion.
For the IIF's full report click on http://www.iif.com
(Reporting by Sven Egenter; Editing by Ruth Pitchford and
Andy Bruce)
