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Central Europe/Russia: Private Capital Flows Continuing

Washington, 23 April 1997 (RFE/RL) - The global association of private financial institutions says the flows of private capital into emerging market economies is expected to continue at near record levels this year, including strong flows to Russia and the nations in Central Europe.

The Washington-based Institute of International Finance (IIF) says that in Europe, net equity investment flows which slowed to $14 billion in 1996 are forecast to rise to $18 billion in 1997.

It says privatization programs and strong performance of regional stock markets are increasingly attracting foreign investors. The institute defines the major emerging market economies of Europe as: Bulgaria, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Turkey.

The institute says in it's regular emerging market capital flows update report that equity investment in Russia is forecast to rise to $4.5 billion this year, up from $3.3 billion in 1996. The increase, it says, is due to higher privatization receipts as well as generally increased flows in portfolio investments.

In addition, the institute forecasts that Russia will experience inflows of short-term foreign capital of around $11 billion this year, mostly in the form of foreign purchases of Russian government treasury bills.

It notes that several countries in the region went to the world commercial bond markets for the first time in 1996 to raise money, most successfully Russia. In addition, the institute notes, Kazakhstan and Croatia have since gone into the bond markets and debut issues by Lithuania, Moldova and Uzbekistan are "in the pipeline for this year."

It sounded a cautionary note, however, that some of those bond issues -- it named no names -- did not carry high enough interest rates to reflect the actual underlying risks. This was partly because of an abundance supply of capital in global markets and the interest of investors in being the first to buy bonds from these emerging economies. However, it noted, interest charges must fully compensate for risks or investors will quickly turn away from these bond issues.

The institute, with a membership of 250 commercial banks, investment banks, investment funds and insurance companies around the world, is the only organization speaking for what it calls the "practitioners" in international financial markets.

Institute Managing Director Charles Dallara, in an open letter to the financial leaders who will attend the spring meetings of the International Monetary Fund and the World Bank over the next week, noted that private capital flows into emerging market economies world wide rose to $255 billion in 1996, far surpassing the $1billion of official capital flows.

However, he said, this shift from public to private finance does not diminish the role of long-standing global institutions like the fund and bank, especially in their roles as coordinators and overseers of the growing global market place.

For example, he said that in working with Russia, the IMF played an extremely important role beyond the loans it made. "Russia significantly upgraded transparency (in financial markets) in the past year" because of IMF efforts, said the letter.

Official flows this year are expected to rise to over $6 billion, but still significantly below the 1995 level of $41 billion or the pattern of the early 1990s averaging around $22 billion.

Because both public and private capital flows are extremely important for emerging markets, Dallara called on the IMF, the World Bank, and other multilateral banks, to expand their coordination with private financial institutions. Cooperation is improving, he said, but still needs to expand to reflect the major role now played by private investors and bankers.