Zurich and Washington D.C., January 26, 2010 — The Institute of International Finance today forecast that net private capital flows to emerging markets are likely to total around $720 billion this year and rise further to about $798 billion in 2011. The IIF estimated that the comparative 2009 total was $435 billion, which is down from $667 billion in 2008 and from the record of over $1 trillion in 2007.

"We are starting to see what could be a substantial multi-year upswing in international capital flows to many emerging markets in response to their sound policy management, solid economic prospects, and significant returns relative to investments in mature economies," said IIF Managing Director Charles Dallara. "We had serious concerns about prospects for flows to emerging markets at the start of 2009, and indeed they were extraordinarily weak at the start of the year fell significantly below the 2008 level. Nevertheless, the situation could have been far worse had it not been for timely and effective actions by governments, multilateral financial institutions and the private sector."

William R. Rhodes, First Vice Chairman of the IIF's Board of Directors, Senior Vice Chairman of Citigroup and Citibank, noted, "Latest developments, including the IIF's analysis of prospects for capital flows, support the view that the global economy and its financial system are out of the emergency ward. However, they are still far from being in sound health. We have to be vigilant to avoid reversals. New actions in coming months will be essential to strengthen economic prospects and the financial system. We need to see internationally coordinated policy measures on trade, fiscal and monetary policies, underlying imbalances, and financial regulation."

The IIF, which is the leading global association of financial institutions with over 380 members, said that a significant turnaround in net private portfolio equity flows to emerging markets led the recovery in 2009. An upswing in net bond flows, driven by both sovereign and corporate borrowers, combined with more positive momentum in commercial bank lending and foreign direct investment, are now set to lead growth in overall flows this year. The prospective increased flows will be seen across all emerging market regions, but the IIF pointed out that a number of countries, from Argentina, Ecuador and Venezuela in Latin America to Ukraine and the Baltic states in emerging Europe continue to face significant challenges.

Contrasts between trends in emerging market and mature economies

Speaking at a press conference in Zurich today, Mr. Rhodes noted, "Global economic recovery has been spearheaded by emerging market economies. The IIF now estimates that by 2011, the combined total nominal GDP of its sample of the 30 leading emerging market economies will amount to 57 percent of the combined GDP of the United States, the Eurozone and Japan. In 2006, that was just 40 percent.

Mr. Rhodes said, "We face a situation that in my more than 50 years in banking is without precedent: we are seeing rising levels of private capital flows moving into emerging market economies not only because these are demonstrably good places to invest in, but also because their growth prospects look decidedly more favorable than the rather meager ones of the mature economies."

The IIF expects growth in the mature economies to be about 2.4 percent this year and then slow to 2.0 percent in 2011. By contrast, the IIF sees emerging market economies growing strongly by 6.1 percent this year and 5.9 percent next year. In addition, according to today's report, the IIF expects that leading emerging market economies, such as China and Brazil will take money policy actions to curb inflationary pressures, which may boost interest rates somewhat as the year proceeds. This may widen the yield differential to rates available on mature economies that will continue to experience high unemployment levels and pressures to keep rates very low.

Mr. Rhodes said, "We face a risk of increasing volumes of short-term, yield-chasing, cash moving into some emerging markets. More generally, some economies are seeing rising inflationary pressures. This will be a testing time for governments and central banks in emerging markets. I believe that there is an acute sensitivity to this in key capitals."

Mr. Rhodes noted, "The scale of flows into emerging markets will also be enormously impacted by the policies pursued in the leading mature industrial economies. While they are recovering from the recession, these governments face contrasting pressures. Sluggish growth and high unemployment levels are producing demands to keep the stimulus throttle open, even to expand stimulus. Moreover, there is the understanding that retreating from stimulus too early, as history suggests happened in 1937, could be a mistake. However, as we saw with the stagflation of the late 1970s, adjusting too slowly involves profound risks.

He added, "My own view and one that is widely shared in the IIF is that financial market stability and longer-term economic health require clear indications from the authorities of their plans to curb expanding fiscal deficits and the great volume of liquidity in the system. Ensuring that reductions in unemployment is secured and then sustained needs to go hand-in-hand with unambiguous signals from the governments and central banks of the mature economies of how they aim to bring rising budget deficits and exceptional liquidity under control. I believe these difficult policy challenges will dominate market and economic developments in 2010."

Key Trends in Capital Flows

IIF Chief Economist Philip Suttle pointed out, "Our new forecasts show some pick-up in foreign direct investment (FDI) flows into emerging markets, but there are two significant constraints here - first, the impact of the recession on major multinational corporations; and second, the increasing ability of firms to locally finance plant additions and other investments. Similarly, we are also seeing some upswing in commercial bank flows, but here as well constraints include the need for the banks to deleverage and build capital, plus a lack of demand for such funds from some of the fastest-growing emerging markets that can obtain alternative sources of financing."

Mr. Suttle pointed out that there are some significant differences in the levels and types of capital flows to different emerging market regions.

Mr. Suttle stated that net portfolio equity flows were negative $93 billion in 2008 but recovered formidably in 2009 to an estimated total of about $120 billion. He said that a leveling off of such flows is likely in the period ahead with the IIF forecasting net totals of about $106 billion for this year and $100 billion in 2011. He said that it is likely that some emerging market central banks will seek to take actions to dampen the inflows of "hot money" as yield differential widen between these markets and the mature economies.

Mr. Suttle added that, "It was important that the resources of the IMF in particular were expanded in 2009 and that it introduced new facilities, at the urging of the IIF, to assist well-performing countries if it was necessary. This added confidence. We now see that net official flows of capital to emerging markets in 2009 were about $68 billion, somewhat above the $57 billion of 2008. We now see a downward trend with about $56 billion this year and under $40 billion in 2011."

Group of 20 Actions

Mr. Rhodes noted that this is now the time for new leadership. He pointed to the example set in early 2009, which led to important decisions being taken. As an illustration he pointed to "The IMF's Flexible Credit Line facilities, which were established after many calls for such action, including from the IIF and myself, given our concerns about the limitations of the Fund's then Short Term Lending Program. This FCL facility proved to be an important stabilizer of funding for the countries that utilized it."

Now, he emphasized, the outlook for capital flows and for economic growth and stability will be highly influenced by the concrete actions taken by governments and central banks to implement the "Framework for Strong, Sustainable and Balanced Growth" that was announced at the Group of 230 Summit in Pittsburgh last September. He said that so far "Action has not followed rhetoric. Mr. Rhodes highlighted four critical issues that the G-20 needs to deal with on an urgent basis:

1. Rolling back current protectionist measures in both trade and finance, preventing new restrictions in trade, setting a firm date for the Doha Round's conclusion, and enhancing cross-border regulatory and supervisory coordination and agreement on financial reforms.

   It is important to underscore the seriousness of the financial fragmentation issue. The system that has evolved over the last generation is a globalized one, involving deep inter-connectiveness of institutions and markets across national borders. Actions by governments to take unilateral measures to ringfence deposits, or to impose special taxes, or initiate regulatory reforms that are not consistent with the thrust of international measures, will damage the financial system. The G-20 has stated in its summit declarations an acute awareness of this risk, yet almost every day now we are seeing policy decisions and announcements that are not being coordinated and that have the potential of doing systemic damage.

2. As I explained earlier, we need to see clear articulation by governments - especially those of the mature economies - of their medium-term fiscal correction strategies;
3. And, at the same time, we need to see credible exit strategies from central banks to unwind the massive liquidity created during the crisis.
4. In addition, we dare not risk complacency on the issue of imbalances. It is long overdue that the IMF, strongly supported by the G-20, formulates an agenda for action on current account imbalances between the major deficit and surplus economies to prevent a recurrence of large new imbalances.

He said, "These actions, which should be key components of the framework described by the Pittsburgh summit, are essential for restoring economic and financial stability."

Mr. Rhodes added, "More generally, it is noteworthy that for the first time the leadership of the G-20 has been assumed by an emerging market country. This is a symbol of the changing dynamics in our globalized economy. I am delighted that South Korea has taken the G-20 chair and I believe that we can look forward to President Lee Myung-bak making every possible effort to build the G-20 into a body that takes important decisions and ensures that actions follow."

Good afternoon. Exactly one year ago here in Zurich we emphasized the extraordinary strains in the world economy. I said at the time that the actions that would be taken, most notably at the April 2009 G-20 Summit in London needed, above all, to be undertaken with a spirit of strong partnership between the public and the private sectors.

Looking back at 2009, I believe that we have seen important leadership from members of both the private and public sectors.. Significant informal discussions took place with senior officials at last year's World Economic Forum in Davos and a great deal of work directly thereafter resulted in coordinated efforts to secure the kind of stimulus initiatives that avoided a more dangerous crisis. When some of us working with the IIF met UK Prime Minister Gordon Brown at the end of March just before the London Summit he underscored his resolve that the G-20 would promote effective international policy coordination.

The actions that were taken by individual countries and in concert transformed what at the start of 2009 looked like a precarious situation for emerging markets. The efforts in many emerging markets, albeit not all, to stabilize conditions and set the basis for growth resulted in a surge in capital flows to most emerging markets and provides momentum for flows now.

My colleagues from the IIF will shortly provide you, for example, with the details of the new forecasts for capital flows that we are releasing today. The IIF is forecasting that net private capital flows in 2010 will reach around $720 billion and then rise to over $795 billion in 2011. This compares to an estimated total of $435 billion in 2009 and $667 billion in 2008 - I think there can be no doubt that the 2009 total would have been far lower had it not been for effective actions by governments, the IMF and the private sector. As an example, I think of the IMF's Flexible Credit Line facilities, which were established after many calls for scuh action, including from the IIF and myself, given our concerns about the limitations of the Fund's then Short Term Lending Program. This FCL facility proved to be an important stabilizer of funding for the countries that utilized it.

We can see from today's new IIF numbers that emerging Asia, Latin America and Africa/Middle East have registered and are to continue registering substantial gains in flows.

As we look at immediate prospects, however, I want to emphasize two closely related points:

• First, the global economy and its financial system are out of the emergency ward, but they are still far from being in sound health and we have to be vigilant to avoid reversals;
• Second, while there is much that individual governments must do, there is an urgent need to sustain, in fact improve, international policy coordination. Failure here could generate further momentum to the already troublesome protectionist developments that we are seeing, including the fragmentation of the international financial system.

The global economic recovery has been spearheaded by emerging market economies. Many of them embarked on stimulus programs that deservedly have won praise. The IIF now estimates that by 2011, the combined total nominal GDP of its sample of the 30 leading emerging market economies will amount to 57 percent of the combined GDP of the United States, the Eurozone and Japan. In 2006, that was just 40 percent.

Now, we face a situation that in my more than 50 years in banking is without precedent: we are seeing rising levels of private capital flows moving into emerging market economies not only because these are demonstrably good places to invest in, but also because their growth prospects look decidedly more favorable than the rather meager ones of the mature economies.

This is quite understandable when you look at the IIF's new economic forecasts. On the one hand it sees the mature economies growing by 2.4 percent this year and then slowing to an unsatisfactory 2.0 percent in 2011. By contrast, the IIF sees emerging market economies growing strongly by 6.1 percent this year and 5.9 percent next year.

We face a risk of increasing volumes of short-term, yield-chasing, cash moving into some emerging markets. More generally, some economies are seeing rising inflationary pressures. This will be a testing time for governments and central banks in emerging markets, but I believe that there is an acute sensitivity to this in key capitals. As an important example, we are seeing that China's authorities have begun to tighten financial and monetary conditions and this process is likely to persist throughout 2010. Brazil is likely to act effectively as well, as are others.

However, the scale of flows into emerging markets will also be enormously impacted by the policies pursued in the leading mature industrial economies. While they are recovering from the recession, these governments face contrasting pressures. Sluggish growth and high unemployment levels are producing demands to keep the stimulus throttle open, even to expand stimulus. Moreover, there is the understanding that retreating from stimulus too early, as U.S. history suggests happened in 1937, could be a mistake. But, as we saw with the U.S. stagflation of the late 1970s, adjusting too slowly involves profound risks.

My own view and one that is widely shared in the IIF is that financial market stability and longer-term economic health require clear indications from the authorities of their plans to curb expanding fiscal deficits and the great volume of liquidity in the system. Ensuring that reductions in unemployment is secured and then sustained needs to go hand-in-hand with unambiguous signals from the governments and central banks of the mature economies of how they aim to bring rising budget deficits and exceptional liquidity under control.

I believe these difficult policy challenges will dominate market and economic developments in 2010. They cannot be resolved alone at the national government level. Leaders at the Pittsburgh G-20 Summit announced the creation of a "Framework for Strong, Sustainable and Balanced Growth". But, so far, action has not followed rhetoric.

Permit me to highlight four critical issues that the G-20 needs to deal with on an urgent basis. Key to this, however, is action now by the IMF and the WTO, in particular, to work to create the essential framework for stability and growth, which requires:

1. Rolling back current protectionist measures in both trade and finance, preventing new restrictions in trade, setting a firm date for the Doha Round's conclusion, and enhancing cross-border regulatory and supervisory coordination and agreement on financial reforms.

   It is important to underscore the seriousness of the financial fragmentation issue. The system that has evolved over the last generation is a globalized one, involving deep inter-connectiveness of institutions and markets across national borders. Actions by governments to take unilateral measures to ringfence deposits, or to impose special taxes, or initiate regulatory reforms that are not consistent with the thrust of international measures, will damage the financial system. The G-20 has stated in its summit declarations an acute awareness of this risk, yet almost every day now we are seeing policy decisions and announcements that are not being coordinated and that have the potential of doing systemic damage.

2. As I explained earlier, we need to see clear articulation by governments - especially those of the mature economies - of their medium-term fiscal correction strategies;
3. And, at the same time, we need to see credible exit strategies from central banks to unwind the massive liquidity created during the crisis.
4. In addition, we dare not risk complacency on the issue of imbalances. It is long overdue that the IMF, strongly supported by the G-20, formulates an agenda for action on current account imbalances between the major deficit and surplus economies to prevent a recurrence of large new imbalances.

These actions, which should be key components of the framework described by the Pittsburgh summit, are essential for restoring economic and financial stability.

More generally, it is noteworthy that for the first time the leadership of the G-20 has been assumed by an emerging market country. This is a symbol of the changing dynamics in our globalized economy. I am delighted that South Korea has taken the G-20 chair and I believe that we can look forward to President Lee Myung-bak making every possible effort to build the G-20 into a body that takes important decisions and ensures that actions follow.

In a moment I will turn to Phil Suttle to discuss the new capital flows report and then to Charles for some comments on the regulatory front. Let me just emphasize that the regulatory agenda is large and that the IIF has been playing a forthright and constructive role in dialogue with many of the authorities in many countries. It is important at this time when new capital ratios, liquidity buffers, special taxes and additional measures are contemplated that there be coordination and a clear analysis of the cumulative costs of all of these initiatives and the likely impact they may have on constraining bank lending.

And this brings me to a final issue that fails to get sufficient attention and is crucial for stability - accounting standards. We believe that to move forward the Financial Stability Board should exercise leadership in collaboration with the two accounting standards boards to secure a renewed commitment to convergence. We need consistency on a global basis in accounting and regulatory standards to advance progress towards greater stability of the international financial system.

Thank you.