Emerging market debt more 'manageable', according to IIF

New types of securities, particularly derivatives, have contributed to making emerging market debt more “manageable” than ever before, according to the Washington-based Institute of International Finance.

In its report, “Capital Flows to Emerging Market Economies”, the institute said an increasing number of institutional investors, such as pension and hedge funds, were now helping to support emerging market economies. But it cautioned that greater numbers of non-traditional participants combined with the widespread use of credit derivatives has “added new, complex elements to financial markets, which have not been fully tested in a severe market correction”.

The institute said total net private capital flows continued at $502 billion in 2006, just below the record total of $509 billion set in 2005. It also said net commercial bank flows in 2006 exceeded $140 billion for the second year in a row. China and Asia in general remain the biggest recipients of direct investment, according to the report, although it pointed to a rapid rise in investment in central and eastern Europe as well.

The institute predicts total net private capital flows of $470 billion in 2007, and net commercial bank flows of $100 billion. The figures, which are slightly lower than those for 2006, reflect an estimated modest decline in global economic growth.