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WASHINGTON, DC - A group representing hundreds of private banks and other financial institutions forecasts that net investment flows to developing countries will rise in 2003 but remain at a historically low level.

At a recent New York press conference, the Institute of International Finance (IIF) issued a report forecasting that private capital flows to emerging markets, dominated by direct foreign investment, would increase to about $139 billion in 2003 from about $110 billion in 2002, well below the annual average $186 billion of the past 10 years.

Charles Dallara, IIF managing director, said the level of private capital flows to developing countries was last this low during the 1980s debt crisis.

"This situation remains quite weak," Dallara said. "The level of flows is nothing to be overly confident about."

He offered a few reasons for why investment flows have not picked up significantly since the Asian crisis in the late 1990s: lack of corporate profitability in wealthier countries that is hindering domestic and foreign investments, a slowdown in privatization by developing countries, and questions about whether emerging markets, especially Argentina, would respect rule of law and sanctity of contracts.

At the same press conference William Rhodes, senior vice chairman of Citigroup, expressed concern about a surge of international demand for emerging market sovereign bonds. He warned that investors should look not only at high interest rates but also at economic policies and performance in countries issuing the bonds.

"We have to be careful that we don't go chasing yields again, as we have done several times in the past, at the risk of not exercising prudent credit judgment," Rhodes said.

He said that part of the higher demand could be attributed to "solid policy performance" in Mexico and Brazil.

The IIF projects "somewhat" improved economic prospects for the US in the second half of 2003 as a result of the brevity of the Iraq war and the fall in oil prices although it cautions that the level of US corporate investment is expected to remain "tepid." It says the outlook for the European Union and Japan remains weak.

Dallara said that Argentina's new leaders would have to achieve comprehensive restructuring of the country's banking system in order to regain access to global capital markets. Rhodes said Argentina would have to reaffirm its commitment to private contracts and improve its fiscal policy, especially in making provincial governments more
responsible for their financial obligations.

IIF forecasts net capital flows to Latin America reaching about $34 billion in 2003, up from $14 billion in 2002, reflecting an expectation of recovery for nearly all big economies there except Venezuela.

It forecasts net capital flows in 2003 to Europe's emerging markets to stay at about the $31 billion 2002 level, up from $14 billion in 2001.

In Iraq, Dallara said, the highest financial priorities are stabilizing the currency and restructuring the banking system.

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