In
the post-Argentina default era the message that
investors will give to officials from emerging
market economies at the World Economic Forum will
be brutal: don't expect to access the global financial
markets unless you demonstrate consistently sound
economic policies and move fast to implement structural
reforms, especially in the banking sector.
The
news on the eve of the World Economic Forum is stark.
According to a brand new report by the Institute of
International Finance (IIF), the global association
of financial institutions, net private capital flows
to emerging markets (EMs) fell by one-third - fully
$44 billion - to $115 billion last year. This is the
lowest level in a decade.
In the heady days in 1996 and 1997, when
the Forum was like a dizzying EM investment
bazaar, net private capital flows reached
the pinnacle of respectively $330 billion
and $270 billion. That was wild. But, even
compared to more sober days, the 2001 total
is miserable. And the outlook for this year
is somber. The IIF predicts that net private
capital flows could reach a modest $144 billion.
The revival
of the market depends to no small extent
on global economic recovery,
stresses William Rhodes, Senior Vice Chairman
of Citicorp/Citibank and Vice Chairman of
the IIF. Japan and Germany are both performing
poorly. "The U.S. has to be the driving
motor of the global economy and this will
be especially important for emerging markets," says
Rhodes.
Last year
in Davos it was the conventional wisdom
that the U.S. economy in 2001 would
be "V" shaped with a sharp recovery
from a sudden downswing. Rhodes was a very
visible odd man out. He stressed that he
saw a much more gradual recovery. He worried
about the extent to which EM officials were
sensitive to the critical challenges of maintaining
investor confidence in a slowing global economy.
The World Economic Forum has many agendas
and one of the most constant and prominent
over the years has been investing in emerging
market (EM) economies. A standing feature
of the meetings has been the marriage brokering
guided by Klaus Schwab as top officials from
EM countries have been given their chance
to present their case for investment inflows
to the world's top businessmen. Many deals
were discussed. The Forum had business value
and Schwab was all smiles.
Now, the tone is radically different. Schwab
is focusing more than ever on global religions
and civil society and no wonder - EM investing
is in trouble. Emerging markets as an investment
asset class is largely in trouble.
Rhodes has been in the midst of every ebb
and flow of the EM waves over the last 20
years. His views will be sought at the Waldorf
in coming days, as will those of IIF Managing
Director and former U.S. Assistant Treasury
Secretary Charles Dallara. Both of these
experts stress that the Argentine cloud hovers
darkly above the markets, but there are some
countries that have managed to evade the
troubling trends. Both Brazil and Mexico,
for example, have recently been successful
large borrowers in the markets.
"You see strong differentiation in
the markets, which is a positive development," says
Dallara. He adds: "We have seen strong
stock market performance in several EM markets
despite the Argentina situation."
Both Rhodes and Dallara have a clear and
strong message for the EM officials flocking
to the Waldorf. They stress that, more than
ever, investors are looking at a host of
fundamental factors in making their judgments.
They are looking at what governments do,
not just at what they say.
Rhodes is unequivocal. EM countries that
want to attract foreign investors need to
have experienced and effective economic policy
leaders in place who can ensure their countries
pursue sound economic policies. Structural
adjustment must be vigorously pursued with
particular emphasis on establishing viable
and strong banking systems. Governments need
to strengthen their efforts to provide greater
data transparency and forge meaningful investor
relations programs, he adds.
Rhodes notes that the EM markets have seen
very rough times in the past and have always
recovered. He believes that intensified dialogue
between the private financial sector, governments
and multilateral institutions must be deepened
to enhance understanding on how best to prevent
crises and, when they arise, how best to
manage crises.
In the corridors of the Waldorf there will
be many experts worrying about Argentina
- will it accept the reality of today's markets
and start to put in place the policy leadership
and the economic policies that can serve
as a solid basis for constructive dialogues
with the International Monetary Fund, the
World Bank, the Inter-American Development
Bank and, of course, the global private investing
community?
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