Emily Vogl, Frank Vogl
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World Financial Leaders Meet in Beijing: Low levels of Capital Flows Seen for Emerging Markets in 2009, But Upswing in 2010
IIF leaders highlight progress on key best practices reforms at financial services firms. They also stress risks of protectionism, fragmentation of the global financial system.
Beijing, China, June 11, 2009 — The Institute of International Finance, representing more than 370 member financial services firms operating across the world, started its Spring Membership Meeting today in Beijing - the largest IIF meeting ever held in China. The meeting has attracted senior Chinese government officials and their counterparts from across the world, together with leaders of many of the largest globally active financial services firms.
Dr. Josef Ackermann, Chairman of the IIF Board of Directors, Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG, said the IIF meeting is particularly timely and, "The global crisis has underscored the importance of China and other leading emerging market economies on the world stage. It is appropriate that we meet here now and listen carefully to our many colleagues at this conference from China and from other emerging market economies. Their contribution to global recovery is likely to be significant."
In a report today, the IIF emphasized that there will be a dramatic decline in net private capital flows to emerging markets this year with a likely volume of just $141 billion, which is less than one-half of the 2008 total of $392 billion and far below the record of $888 billion seen in 2007. Nevertheless, a modest revival of flows is now starting to become evident and the IIF projects that the 2010 volume will reach $373 billion.
The IIF said this modest 2010 rise in capital flows to emerging markets is expected to come from debt-related flows, attracted, in part, by the persistence of wide nominal interest rate differentials between mature and emerging economies. The report said that investor distinctions between mature markets and emerging markets are becoming blurred and this "new normality" when it comes to perceived country risk implies a higher share of globally mobile capital liable to be allocated to emerging economies.
Dr. Ackermann said here that, "The IIF's latest economic forecasts point to 2010 as a year of global recovery, albeit at quite a modest rate with GDP rising by just over two percent, following a likely decline in world GDP of three percent this year. While there is some encouraging news, the members of the IIF's Board of Directors and the financial industry more broadly are acutely aware that we continue to face daunting challenges - to restore confidence, to strengthen our institutions, and to ensure that they contribute effectively to the vital creation of new jobs in our economies."
Mr. William Rhodes, First Vice Chairman of the IIF's Board of Directors, Chairman and President, Citibank and Senior Vice Chairman, Citi, said, "The global economic recovery remains fragile. Rarely before have policy-makers had to confront so many great challenges on the economic and financial front as they do today. While we should be encouraged by the determination displayed by the leaders at the last G-20 Summit, we should recognize that testing times lie ahead. It is of the greatest importance that every effort be made by the G-20, acting in unison and with force, to secure a standstill and then a rolling back of protectionism - protectionism in trade, investment and finance. All of the Group of 20 member governments need to cooperate now to bring about a swift and constructive conclusion to the WTO Doha Trade Round."
Implementing Key Reforms at Financial Services Firms
Speaking at a press conference here, Dr. Ackermann said, "We meet here in Beijing in intensive working sessions to forge understandings and to come together under the IIF's umbrella to press ahead with a vital agenda." A key priority is implementing the many recommendations of the Final Report of the IIF Committee on Market Best Practices, published last year that covered risk management; compensation policies; liquidity risk, conduits and securitization; valuation; the ratings process and credit underwriting issues; as well as transparency and disclosure. Noting reforms in risk management and compensation approaches being taken by financial services firms, Dr. Ackermann said, "There is still a great deal to do, but it is important to bring to your attention that significant progress is being seen today on taking the lessons from this crisis and moving forward to implement far-reaching reforms."
He noted that, "We are not only working hard to implement best practices in many key areas of our businesses, but we are looking ahead to promote crisis avoidance. Here again we have been busy at the IIF. We have established a Market Monitoring Group to detect systemic risks at an early stage and focus the world's attention on these risks. Our goal is to develop an early warning system and in so doing, help to strengthen the global financial system."
In addition, he stressed progress under IIF leadership on a range of regulatory issues, such as how much capital is put against the trading book, reducing procyclicality, and establishing a level playing field in global accounting approaches. He noted that, "In addition, a key topic of our attention relates to risks associated with today's high levels of market inter-connectedness. There is a need to formulate approaches that promote both greater market stability and ensure that markets operate efficiently."
Dr. Ackermann said, "We believe that reform of the global architecture should be guided by three objectives: first, ensuring the safety and soundness of customer deposits and the protection of investors; second, making certain a regulatory system is in place that safeguards systemic soundness; and, third, ensuring that the rules of the game and the supervisory structures they require support the ability of the financial system to innovate, to promote enterprise and competition and to be a forceful engine of growth. We do not think it will helpful to focus reforms on issues such as the size of individual institutions or the scope of their businesses."
Fragmentation of the Global Financial System
IIF Managing Director Charles Dallara stated at today's press conference that, "We are seeing governments taking measures that are leading to the fragmentation of the global financial system. This is both costly and detrimental to the system. This results from particular domestically focused measures taken in response to the financial crisis, notably in their efforts to support and stabilize domestic banking systems, and to strengthen prudential regulation in the wake of the crisis. The authorities of individual countries have often adopted these measures with little, if any, consultations with partner countries. If these measures are allowed to accumulate, then, for example, they could increase financing costs to consumers and businesses, raise barriers to global capital and liquidity flows, and, over time, weaken the ability of the global economy to deliver growth and create investment."
Dr. Ackermann, noting the risks of fragmentation to the international financial system, said, "The trends that have come to the foreground, if continued, could create a protectionist environment that will be damaging for all. We believe it is essential that actions be taken to not only roll back the inward-looking measures that are being seen, but to also promote international support to enhance the ability of banks to provide low cost services to their customers."
In a staff paper released here, the IIF highlighted specific actions that the Financial Stability Forum (FSB), the Basel Committee on Banking Supervision and the IMF should pursue to counter current fragmentation trends. It stressed that a critical part of the new Financial Stability Board's (FSB) task of regulatory coordination among standard-setters should be to alert the international regulatory community to the dangers of fragmentation. Where possible within its mandate, it should take action, or urge its member organizations to take action, to reduce fragmentation, finding means to address underlying problems that do not exacerbate fragmentation.
Private Capital Flows to Emerging Markets
The IIF said that following a period of extreme weakness between October 2008 and March 2009, flows to emerging markets appear to have improved somewhat over the last two months, albeit to levels far below the early months of 2008. Overall, today's forecasts for 2009 have not changed markedly since the IIF's last report in January.
Mr. Rhodes stressed at the press conference that moderate recovery in capital flows partly reflects a rise in investor confidence both in response to measures taken by national governments in emerging markets, including in China, to stimulate their economies and to the international support that emerging markets are now starting to receive.
Mr. Rhodes noted that one reason for the improvement in prospects for capital flows now is that official actions have recently been taken to provide additional finance to emerging market countries, which the IIF called for in its October 2008 press conference, and again in the first few months of 2009. He said that the IMF's new flexible credit facility and the expansion of swap facilities by key central banks have been very important. "The IMF must deploy its expanded resources with skill to assist its member countries to achieve economic recovery. And, it is also important that every effort be made to increases the resources available to the World Bank Group, including the International Finance Corporation, and to the regional development banks, including the Asian Development Bank. These institutions have major roles to play at this time."
The new IIF report highlighted important regional divergences. Most significantly, projections of flows to Emerging Asia and Latin America have been revised upwards somewhat, while revising down the estimates of net flows to Emerging Europe. Aggregate net repayment of private sector capital by Emerging Europe, of $33 billion, is now foreseen in 2009, after net inflows of $214 billion in 2008. This is partly the result of a significant tightening in the availability of the supply of external financing to the region, while also reflecting a sharp decline in the demand for finance from external creditors. For 2010, the IIF forecasts an upswing in net flows to $122 billion.
The IIF projected that net private capital flows to emerging markets in Asia will rise to $120 billion in 2010 from a projected $88 billion this year, which compares with $59 billion in 2008 and a record of $296 billion in 2007. The IIF said that net private capital inflows to China, which moderated from a peak of $153 billion in 2007 to $88 billion in 2008, are set to stabilize at around $60 billion this year and next year and it added that China's official foreign exchange reserves are set to reach $2.1 trillion by the end of 2009 and $2.5 trillion by the end of 2010.
In a report on China's economy, that the IIF also released here today, the Institute said the strengthening in domestic demand should boost the year-on-year increase in real GDP from 6.1 percent in the first quarter of 2009 to more than 8 percent in the second half of the year. A gradual recovery in exports is likely to add to the renewed momentum in the economy to raise real GDP growth to 9 percent in 2010. Moreover, additional supportive policy measures are also likely to be forthcoming if growth slows.
The IIF said that net private capital flows to Latin America are likely to rise to $103 billion next year from $63 billion this year, after $89 billion in 2008. As for Middle East-Africa, (excluding the GCC), the new report said that flows are likely to be quite stable at around $28 billion in 2010, after $23 billion this year and $31 billion in 2008. The IIF released an "update" on the outlook for the China economy.
Emily Vogl, Frank Vogl