The effects of the global financial crisis, which began in July 1997 with the devaluation of the Thai baht and reached a climax last August with Russia to default and the near collapse of Long-Term Capital Management, work continues through financial markets.

One of the most worrying was highlighted in a report published yesterday by the prestigious Institute of International Finance (IIF). This association of the world’s largest banks predicts another year of weak capital flows to emerging economies in 1999, with indications that lenders and investors are more than ever discrimination in favour of a few countries.

The total net private capital flow to emerging economies was just over $ 140bn (pounds 86bn) in 1998, a sharp decline from 1997 total of $ 263bn last year and the record $ 328bn. The IIF expects that this year the figure is approaching the same as last year. Within this total there will be some changes. Direct investment remained very well last year to $ 120bn, thanks to bargain prices. But slower growth in the global economy will have a negative effect, reducing this year the figure to an estimated $ 103bn. The IIF expects nothing less than a catastrophic drop in bank lending to emerging markets. Net flows of commercial banks fell from $ 29bn in 1998 and is expected to pass by another $ 11.8bn this year. Through the current non-bank creditors - mainly bonds - are expected to total $ 28bn to $ 49bn later in 1998. Taken together, the flow of private credit is only $ 16bn in 1999, slightly less than in 1998 and down from nearly $ 200bn in 1996. With much of new loans unintentional - the result of interest arrears in Russia and Indonesia - will be a voluntary credit meagre $ 7bn. There is a bright spot. Portfolio capital flows have begun to recover and should increase. The prognosis is $ 20bn, in 1998 the small $ 2BN, as emerging equity markets continue to recover. And in another sign that the crisis is diminishing, official flows are likely to decline. They friolera amounted to $ 51bn last year, but is expected to dip to $ 33.5bn this year, with no new emergency financial charts. Charles Dallara, IIF managing director, estimated the flow of private credit is improving slowly. “A pick-up of the flow seems possible throughout the year passes, assuming key economies remain on track,” he said. John Bond, chairman of the IIF and board chairman of HSBC Holdings, said that there were some encouraging trends. “Fundamentally, the sustained recovery of portfolio capital flows depend on the ability of emerging market economies to perform well.” But the report says there is evidence that lenders and investors are restricting new lending and investment to just a handful of countries. William Rhodes, vice president of Citigroup, said: “There is growing evidence that lenders and investors are more carefully differentiate between emerging markets.” The evidence is in the range of margins bonds in different markets. All spreads between emerging market bonds and safe assets like U.S. Treasury bonds, exploded last August and remain high standards of past, even though they have since declined. But stretches of Asia are lower by far than those for countries americas America and Eastern Europe bonds, and much of the recovery in net new investments reflects an end to disinvestment in Asia that characterized 1998. Moreover, flows to Central and Eastern Europe are still in decline. For example, Brazil still pays around 8.2 percentage points above the odds to borrow in international capital markets, down from a peak of 11.25 percentage points. This compares with a 2.5 percent premium for the bonds in Asia, compared to 9.6 points in August and 3.6 points at the end of 1998. Korea and Thailand are currently in a better position now than before August crisis. The report concludes that there has been a real improvement in only a limited number of high quality borrowers. And investors remained cautious. The report said: “serious political diversion a key factor in the economy could have a major impact on sentiment.” Hence, could also curb growth in developed economies. The low growth in the G-7 will erode and the prospects for creditworthiness in emerging markets. The report also contains a special warning about the dangers of protectionism rampant, especially in the U.S. market so crucial to emerging economies. The dispute over bananas in the EU, the approval of a bill in the House of Representatives imposing steel quotas, the postponement of the entry of China into the World Trade Organization - are all ominous signs of protectionism. The experts’ verdict is that the worst of the crisis is over and signs of normalization are obvious. But the note of caution expressed by the IIF is unmistakable.

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