Washington, DC, October 21, 2007 — Net private capital flows to emerging markets are expected to reach a record $620 billion this year, after a 2006 total of $573 billion. The Institute of International Finance (IIF) today forecast that private flows are likely to reach another high level in 2008 of around $600 billion.

Dr. Josef Ackermann, Chairman of the IIF's Board of Directors and Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG, said, "Emerging markets have demonstrated notable resilience in the face of the recent dislocations in global financial markets that were triggered by the U.S. subprime mortgage market crisis. The overall outlook for continued capital flows to emerging markets is positive."

Speaking at a press conference at the 25th anniversary IIF membership meeting, Dr. Ackermann added, "Looking back at the conditions that prevailed a quarter of a century ago when the outbreak of the Latin American debt crisis led to the establishment of the IIF, one sees remarkable progress by emerging markets' economies in strengthening their economic and financial fundamentals."

The IIF is the global association of financial services firms with more than 370 member institutions. Mr. William Rhodes, First IIF Vice Chairman and Senior Vice Chairman, Citigroup Inc., Chairman, President, and Chief Executive Officer, Citibank, NA, noted: "To their credit, emerging markets are sustaining significant growth, consolidating their fiscal positions and building foreign exchange reserves. These are levels of performance that few people expected just a few years ago. However, vulnerabilities continue to persist as we look ahead. A further possible slowing of growth in the major economies could impact the emerging markets; there are risks of excessive asset price appreciation; a strengthening of inflationary pressures in a number of countries, which have to be resisted; and the potential of a disorderly foreign exchange markets, should not be ignored."

The IIF noted that emerging market economies in aggregate are continuing to register sizable current account surpluses. China alone is likely to see a current account surplus of $380 billion this year and $450 billion next year, with its foreign exchange reserves reaching about $1.9 trillion by the end of 2008. The IIF added that the foreign exchange reserves of the 30 leading emerging market countries are set to rise by $756 billion this year, after a gain of $554 billion in 2006, while a further rise of $707 billion is projected for 2008. The IIF forecasts that end 2007 reserves for the 30 leading emerging market economies will be $3.46 trillion, which would exceed for the first time the total external debt of these countries, which is projected at $3.30 billion.

Commercial bank lending is the component of private capital flows most likely to be reduced by recent financial turmoil in the coming year. The IIF projected that net flows from banks are likely to fall in 2008 to $146 billion, from $189 billion in 2007 and a peak of $202 billion last year.

The reduction reflects a combination of three factors: demand for borrowing from banks has declined; banks themselves have become far more cautious, especially since the onset of recent turmoil; and, said the IIF, "A final factor that will come into play in coming months will be the balance sheet constraints that banks in the major money centers are faced with across the board as they are required to expand their assets rapidly as a result of commitments to fund both LBOs and asset-backed conduits and SIVs. This will reduce credit availability for all borrowers, emerging markets included."

The IIF is forecasting a pronounced slowing in growth in the short-term in the leading industrial economies in part as a result of the recent turbulence in financial markets. But, helped by recent Fed easing, growth in these economies is seen as strengthening through 2008. The projected growth is likely to support the momentum in emerging market economies, where the IIF forecast GDP rising by 7.1 percent next year, after 7.5 percent this year and 7.2 percent in 2006.

Foreign direct investment (FDI) flows into emerging market economies continue to account for the largest share of capital flows with the IIF projecting these to rise to $213 billion this year, up from $167 billion last year. A further gain to $223 billion is projected for 2008. Moreover, the report stressed that the development of sovereign wealth funds and multinational companies headquartered in emerging markets is leading to a rapid rise of FDI investments both across borders within emerging markets and from these economies to the mature economies.

The report noted, "One of the most important recent FDI developments has been the rise in flows to countries where net inflows had previously been conspicuously weak, especially India and Turkey. In 2008, net inflows of FDI are projected to be $19 billion to each of these countries."

Portfolio equity flows to emerging markets is likely to remain robust, as global investors continue to diversify into emerging market stocks, said the IIF. It forecast that these net flows will amount to $54 billion next year, after $52 billion this year and $62 billion in 2006.

With regard to emerging markets bonds, IIF Managing Director Charles Dallara noted that: "When recent global financial turmoil was at its greatest in August, it seemed that there was some risk of a sizable outflow of capital from emerging markets sparked by sales of marketable (local and external) debt securities by investors. The aggressive action of the U.S. Federal Reserve in cutting the discount rate and, later, the Fed funds, rate helped stem these pressures and indeed we have seen renewed inflows to debt and equity emerging markets."

The IIF projected that debt-related flows from non-bank private sector sources will remain steady in 2008 at about the same volume of 2007 at $170 billion, after $ 141 billion last year. These flows have been dominated by flows to Emerging Europe, and this is expected to persist with about two-thirds of total flows going to this region ($110 billion), of which $42 billion is projected for Russia mainly bond issues by domestic banks and corporations. Flows to other countries in Emerging Europe are also expected to remain substantial, reflecting mainly continued large intercompany flows and investor expectations of continued convergence between local fixed-income markets in a number of countries such as Turkey, Hungary and Poland with those in the West.

The shares of the total accounted for by net flows to Latin America (10 percent, or $16 billion) and Emerging Asia (21 percent, or $34 billion) are well down from their levels in the late 1990s. "While investors looking for debt securities in those regions may still have a healthy appetite, borrowers there have a much-diminished need (and/or preference) for external finance, noted today's report.

Net lending by official creditors will continue to be modestly positive in 2008. "Repayments of emergency financing packages accounted for huge net outflows in 2005-06 and now that these have been completed, net official flows have returned to their more normal modest levels," it said.

The regional data in the report shows that Emerging Europe is set to continue to obtain the largest volume of net private capital flows, well ahead of Emerging Asia.

Countries covered by the IIF emerging markets report: