The Institute of International Finance (IIF) is projecting further increases in overall net private capital flows to emerging markets this year to more than $1 trillion, following a 54% rise to $990 billion in 2010. While high inflows contribute to economic growth in emerging economies, they also present policy challenges to those countries already facing inflation pressures, strong credit growth and asset price gains.

The IIF forecast that total net private capital flows to emerging markets are likely to reach $1,041 billion this year and amount to $1,056 billion in 2012. Inflows to both Emerging Asia and Latin America, which rose sharply in 2010, are likely to fall modestly below that level in 2011 and in 2012. Net private flows to the Middle East – Africa region are expected to be significantly below the 2010 level this year, but to recover next year. Total 2011 flows into Emerging Europe are projected to be almost $100 billion above the 2010 total and a further significant advance is seen for 2012.

IIF Deputy Managing Director and Chief Economist, Mr Philip Suttle, stressed that "although total credit growth is strong and rising as a share of GDP in a number of key emerging economies, the ratio of foreign lending to total credit growth has been mostly falling since the financial crisis. Consequently, the emphasis should be on tools that target aggregate macroeconomic imbalances, and not just foreign capital. It is instructive that real interest rates remain close to zero in many emerging economies, and that no large economy has plans to tighten fiscal policy significantly in 2011, even though most are running sizeable budget deficits”.

Mr Jeremy Lawson, the IIF’s Deputy Director of Global Macroeconomic Analysis, told a press conference here: “Our forecast for capital flows to remain strong this year and next, but not to accelerate significantly, reflects the Institute’s perspectives on underlying fundamental economic developments. Emerging markets’ GDP growth is expected to moderate from 7.2% in 2010 to 6.1% in 2012. This remains well above growth rates in mature economies, although the gap is seen as narrowing. We expect that interest rate differentials with the mature economies will widen in the near-term as the emerging markets combat overheating, but then stabilise next year as policy normalisation in the mature economies gathers pace”.

Press release