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Central/Eastern Europe: Private Capital To Exceed Official Sources This Year

Washington, 12 September 1997 (RFE/RL) - Private capital flowing into eight countries in East and Central Europe is expected to exceed $57 billion this year, a 36 percent increase over 1996, according to the Institute of International Finance.

The movement of private capital into Bulgaria, the Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Turkey was compiled by the Washington-based institute.

By comparison, the institute says financial flows from official sources, such as the International Monetary Fund and the World Bank, into the region will decline by nearly 29 percent this year, dropping from $8 billion in 1996 to an expected $5.7 billion this year.

The institute, the international organization of commercial banks, insurance companies and stock mutual funds, compiles the figures from its member companies and official sources.

The institute says the portfolio equity investment portion of the flow into East and Central European economies -- purchases of stock shares -- is expected to rise from a modest $1.3 billion last year to about $5 billion this year.

Much of that increase in portfolio equity investment is in Russia, which the institute says may receive $4 billion of the total, up from $900 million worth in 1996.

Institute Managing Director Charles Dallara says Russia is a "paradox" because while "foreigners keep putting money into" the country, Russians' themselves "keep taking money out." He told a press conference that this pattern hasn't changed very much since Russia first turned toward adopting a market based system.

"The outflows have been quite strong and continue to be quite strong," he said of the capital leaving Russia. He noted, without comment, that one "can always learn something from the behavior of domestic investors as well as foreign investors."

Dallara says that while Russia has made "impressive progress" in achieving low inflation and a degree of price and exchange rate stability, there are some critical areas of the economy in which structural reforms cannot be delayed any longer.

"You cannot bring Russia dynamically into the 21st century unless the energy and other key sectors in that economy are reformed," he said.

Dallara said his organization of global bankers, stock fund managers and private insurers is "encouraged" by the team of economic reformers working with Russian President Boris Yeltsin. But he said, they are "clearly facing resistance" and need all the support and encouragement they can get from the international community to overcome the hurdles they still face.

World bond markets have become a favorite place for many countries to raise money and the institute says that trend was particularly noticeable for Russia, which is expected to have raised nearly $24 billion by the end of this year.

The institute says the jump from the $10 billion raised on bond markets last year reflects "large-scale purchases by non-residents of short-term local currency government securities, mainly six-month treasury bills, and substantial bond issues."

Globally, the institute warned that the recent turmoil in currency and capital markets in Thailand and some other Asian nations reenforced the need for government's to act quickly when problems arise instead of waiting for the IMF. "Postponed adjustment only becomes costly adjustment," said Dallara.

The greatest danger to most emerging market and transition nations is that of weak financial systems, said Dallara. "Weak and inadequately supervised financial institutions can seriously damage an economy, heightening vulnerability to external forces," he said.