Emerging markets hit at ‘critical’ time
Emerging markets hit at ‘critical’ time
By Jennifer Hughes in New York
Published: May 30 2006 05:01 | Last updated: May 30 2006 05:01. Copyright by The Financial Times
Volatility in emerging markets and fears of a flight of foreign capital have come at a ‘critical’ time for developing countries’ financial markets, World Bank economists have warned.
Record amounts of money flowed into developing economies last year, the World Bank says in a report to be released on Tuesday. But recent sharp market falls, in particular last week, have intensified investor nervousness about the fragility of these markets.
Mansoor Dailami, the lead author of the report on global development finance, said: “This moment is so critical to give these countries the time to develop their markets. Many developing economies are half in, half out of the global financial system – they’re half open, half closed right now.”
A record surge in private capital for a third straight year to $491bn drove the overall rise in net inflows into emerging markets, which reached $472bn as official flows actually declined, the report says.
Many overseas investors have been putting money into local currency assets, which tend to offer higher returns. The money has allowed many developing economies to improve their financial position by paying down old dollar-denominated debt and instead issuing local currency bonds, which in turn has helped them develop and strengthen their local markets.
The biggest emerging market inflows last year went to Europe and central Asia, which recorded a 20 per cent jump to $192bn, led by a rush of money to Russia and Turkey. Inflows into Latin America and the Caribbean rose by 60 per cent to $94bn, while Asia received $138bn, up 10 per cent.
But volatile markets last week, triggered the biggest weekly outflow from emerging market funds in two years, according to Emerging Portfolio Fund Research, a consultancy.
Low interest rates in the developed world have allowed investors to leverage, borrowing cheaply to pick up the higher returns on offer elsewhere. It is those investors who are likely to have unwound trades over the past fortnight, weakening stocks and local bonds.
“If these foreigners withdraw, then local market rates go up and that’s an area we’re worried about,” said Mr Dailami.
The report also warns of the risks posed by the surge in capital flows, not least the risk of asset price bubbles. Global inflows into emerging market investment funds had already set an annual record by March this year, but there are concerns that the money flowing into local stock markets could be concentrated in a few better-known companies.
“You can have thousands of companies that are potentially good investments, but you have a few that get all the money,” said Mr Dailami.
“[This] may expose institutional and macroeconomic weaknesses that cannot be anticipated at this juncture,” the report said. “The impact of individual risks could be magnified if several [weaknesses] were to occur simultaneously.”
Last week, emerging stock markets endured their worst losing streak since Russia defaulted in 1998, a run that plunged world markets into turmoil.
By Jennifer Hughes in New York
Published: May 30 2006 05:01 | Last updated: May 30 2006 05:01. Copyright by The Financial Times
Volatility in emerging markets and fears of a flight of foreign capital have come at a ‘critical’ time for developing countries’ financial markets, World Bank economists have warned.
Record amounts of money flowed into developing economies last year, the World Bank says in a report to be released on Tuesday. But recent sharp market falls, in particular last week, have intensified investor nervousness about the fragility of these markets.
Mansoor Dailami, the lead author of the report on global development finance, said: “This moment is so critical to give these countries the time to develop their markets. Many developing economies are half in, half out of the global financial system – they’re half open, half closed right now.”
A record surge in private capital for a third straight year to $491bn drove the overall rise in net inflows into emerging markets, which reached $472bn as official flows actually declined, the report says.
Many overseas investors have been putting money into local currency assets, which tend to offer higher returns. The money has allowed many developing economies to improve their financial position by paying down old dollar-denominated debt and instead issuing local currency bonds, which in turn has helped them develop and strengthen their local markets.
The biggest emerging market inflows last year went to Europe and central Asia, which recorded a 20 per cent jump to $192bn, led by a rush of money to Russia and Turkey. Inflows into Latin America and the Caribbean rose by 60 per cent to $94bn, while Asia received $138bn, up 10 per cent.
But volatile markets last week, triggered the biggest weekly outflow from emerging market funds in two years, according to Emerging Portfolio Fund Research, a consultancy.
Low interest rates in the developed world have allowed investors to leverage, borrowing cheaply to pick up the higher returns on offer elsewhere. It is those investors who are likely to have unwound trades over the past fortnight, weakening stocks and local bonds.
“If these foreigners withdraw, then local market rates go up and that’s an area we’re worried about,” said Mr Dailami.
The report also warns of the risks posed by the surge in capital flows, not least the risk of asset price bubbles. Global inflows into emerging market investment funds had already set an annual record by March this year, but there are concerns that the money flowing into local stock markets could be concentrated in a few better-known companies.
“You can have thousands of companies that are potentially good investments, but you have a few that get all the money,” said Mr Dailami.
“[This] may expose institutional and macroeconomic weaknesses that cannot be anticipated at this juncture,” the report said. “The impact of individual risks could be magnified if several [weaknesses] were to occur simultaneously.”
Last week, emerging stock markets endured their worst losing streak since Russia defaulted in 1998, a run that plunged world markets into turmoil.
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