After the crisis, private lenders close the purse

News Analysis: The worst of the turmoil is over, but private capital flows to emerging economies have dried up

THE EFFECTS of the global financial crisis, which began in July 1997 with the devaluation of the Thai baht and reached a climax last August with Russia's default and the near-collapse of Long-Term Capital Management, are still working through the financial markets.

One of the most worrying was highlighted in a report published yesterday by the prestigious Institute for International Finance (IIF). This association of the world's biggest banks predicts a further year of subdued capital flows to emerging economies in 1999, with signs that lenders and investors are more than ever discriminating in favour of just a few countries.

The total net private capital flow to emerging economies was just over $140bn (pounds 86bn) in 1998, a sharp drop from 1997's $263bn total and the previous year's record $328bn. The IIF expects this year's figure to be about the same as last year's.

Within that total there will be some shifts. Direct investment held up extremely well last year at $120bn, thanks to bargain prices. But slower growth in the world economy will take its toll, reducing this year's figure to an estimated $103bn.

The IIF expects nothing less than a catastrophic drop in bank lending to emerging markets. Net flows from commercial banks fell by $29bn in 1998 and are expected to drop by another $11.8bn this year. Flows via non-bank creditors - mainly bonds - are expected to total $28bn after $49bn in 1998.

Taken together, private credit flows will be just $16bn in 1999, somewhat less than in 1998 and down from nearly $200bn in 1996. With much of the new lending involuntary - the result of interest arrears in Russia and Indonesia - voluntary lending will be a meagre $7bn.

There is one bright spot. Portfolio equity flows have begun to recover and should rise. The forecast is for $20bn, on 1998's tiny $2bn, as emerging equity markets continue to recover.

And, in another signal that the crisis is abating, official flows are likely to decline. They totalled a whopping $51bn last year, but are forecast to dip to $33.5bn this year, with no new financial emergency on the cards.

Charles Dallara, IIF managing director, reckons the flow of private credit is improving slowly. "A pick-up in flows appears possible as the year goes on, assuming key economies remain on track," he said.

John Bond, chairman of the IIF board and chairman of HSBC Holdings, said there were some encouraging trends. "Fundamentally, the sustained recovery of portfolio equity flows will depend on the ability of emerging market economies to perform well."

But the report notes there is evidence that lenders and investors are restricting new lending and investment to just a handful of countries. William Rhodes, vice-chairman of Citigroup, said: "There is growing evidence that lenders and investors are differentiating more carefully between emerging markets."

The evidence lies in the range of spreads on bonds in different markets. All spreads between emerging market bonds and safe assets, such as US Treasury bonds, exploded last August and remain high by past standards, even though they have since narrowed.

But Asian spreads are lower by far than those for Latin American and East European bonds, and much of the recovery in net new investment reflects an end to the disinvestment in Asia that characterised 1998.

On the other hand, flows to central and eastern Europe are still in decline. So, for example, Brazil still pays around 8.2 percentage points above the odds to borrow on the international capital markets, down from a peak of 11.25 percentage points. This compares with a 2.5 per cent premium for Asian bonds, down from 9.6 points in August and 3.6 points at the end of 1998. Korea and Thailand are actually in a better position now than before the August crisis.

The report concludes that there has been real improvement for just a limited number of high-quality borrowers. And investor sentiment remains cautious. The report says: "Serious policy slippage in a key economy could have a major impact on sentiment." So, too, could further slowing of growth in developed economies. Low growth in the G7 would erode prospects and creditworthiness in the emerging markets.

The report also contains a special warning about the dangers of creeping protectionism, especially in the US market so crucial to emerging economies. The EU banana dispute, the passage of a bill in the House of Representatives imposing steel quotas, deferral of China's entry into the World Trade Organisation - all are ominous signs of protectionism.

The experts' verdict is that the worst of the crisis is over and signs of normalisation are evident. But the note of caution expressed by the IIF is unmistakable.

News
Alan Bennett has criticised the “repellent” reality shows which dominate our screens
tvBut he does like Stewart Lee
Life and Style
The Google Doodle celebrating the start of the first day of autumn, 2014.
tech
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
Sport
David Moyes and Louis van Gaal
football
PROMOTED VIDEO
News
i100
Life and Style
Vote with your wallet: the app can help shoppers feel more informed about items on sale
lifeNew app reveals political leanings of food companies
News
Former Governor of Alaska Sarah Palin, left, with her daughter, Bristol
newsShe's 'proud' of eldest daughter, who 'punched host in the face'
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
Arts and Entertainment
Salmond told a Scottish television chat show in 2001that he would also sit in front of a mirror and say things like,
tvCelebrity Trekkies from Alex Salmond to Barack Obama
Life and Style
Carol O'Brien, whose son Rob suffered many years of depression
healthOne mother's story of how London charity Maytree helped her son with his depression
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Life and Style
food + drink
News
Rob Merrick's Lobby Journalists were playing Ed Balls' Labour Party MPs. The match is an annual event which takes place ahead of the opening of the party conference
newsRob Merrick insistes 'Ed will be hurting much more than me'
News
A cabin crew member photographed the devastation after one flight
news
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits