Capital for emerging world to top $1 trillion: IIF

The Institute of International Finance said net private capital flows to a group of 30 key emerging market economies across the globe were likely to reach $1.041 trillion this year and rise to $1.056 trillion in 2012.

But it warned of the threat of inflation on growth.

"The high level of capital flows to emerging markets reflects the rising weight of these economies in the global economy and their very strong performance relative to the mature economies in recent years," said Charles Dallara, managing director of the Washington-based IIF.

"Overall, these inflows make a very positive contribution to global growth and it is important to note that approximately 40 percent of the total is accounted for by foreign direct investment."

The new estimates for 2011 and 2012 were both about $80 billion higher than the January projections, mainly due to upward revisions for China and Brazil, the IIF said in the report, "Capital Flows to Emerging Market Economies."

The IIF said that inflows to both emerging Asia and Latin America that had risen sharply in 2010 as their booming economies led the global recovery were set to fall modestly below that level this year and in 2012.

In the Middle East-Africa region, where a number of countries have been gripped by unrest and political turmoil, flows are expected to drop "significantly" below the 2010 level this year, but to recover next year.

The only regional gainer was emerging Europe, including Russia, Turkey and eastern European countries, which had suffered as capital inflows dried up in 2009 amid the global downturn.

The IIF estimated inflows there would rise from $148.4 billion in 2010 to $246.6 billion this year and $300.1 billion in 2012.

But the IIF, grouping more than 430 financial services firms in over 70 countries, warned that rising inflation was the key obstacle to ongoing economic growth.

"Inflationary pressures, rather than high capital inflows, is the largest threat to sustained growth in most emerging economies," Dallara said in a statement.

The IIF chief called on governments to take "the appropriate response" by allowing their exchange rates to adjust gradually, tighten monetary policy where needed, and rely more on fiscal and other policy measures.

Capital controls, which have been introduced by Brazil and some other countries to counter heavy capital inflows, should be used with caution, the IIF said.

Philip Suttle, IIF deputy managing director and chief economist, said that in most cases strong capital flows and rising exchange rates simply came along with strong economic fundamentals, and were a necessary part of macroeconomic adjustment.

"Capital controls are a distraction from the main policy task of reducing aggregate credit growth and inflation," Suttle said.

Large capital flows around the world have been cited by some as a major risk to global growth because of the distortions they can cause, especially in developing countries.

The IIF report came less than two weeks after the head of the Organisation for Economic Cooperation and Development warned against the use of capital controls.

"Capital controls should be seen as a last resort and only as a temporary solution," said Angel Gurria, secretary general of the OECD, which groups 34 of the world's advanced economies

Copyright AFP (Agence France-Presse), 2011