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The East: Private Capital To Increase For Eastern Europe, Decrease For Russia

For several years now, the flow of private capital -- money -- into the countries of Central and East Europe has far exceeded that from official sources like the World Bank and the IMF. The Russian and other financial crises dramatically cut private capital flows last year. Robert Lyle reports from Washington that private capital flows are projected to fall again this year, but not everywhere in the region.

Washington, 27 September 1999 (RFE/RL) -- The Institute of International Finance (IIF), the organization of commercial banks and financial firms around the world, regularly monitors how private capital -- in the form of direct investment, equity investment and commercial bank lending -- flows into emerging market economies of the world.

In the East/Central European area, these private capital flows hit a high of nearly $73 billion in 1997. The Asian and Latin American financial crises cut the figure by more than half to $31.5 billion in 1998.

Now, the IIF forecasts that because of the Russian financial crisis last year, private capital will drop even further in 1999, to about $23 billion.

But the figure is misleading, acknowledges the institute. For while this drop reflects the evaporation of voluntary credit or investment flows to Russia, investment and lending to the other countries of Eastern and Central Europe are strengthening and should significantly rise next year.

The IIF measures capital flows into Bulgaria, the Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Turkey for this region.

For the year 2000, the IIF estimates private capital flows to the region will almost return to the 1998 level -- hitting over $31 billion. And that is without the expectation of any significant return of private capital to Russia next year.

The institute says net private capital flows to all of the 29 major emerging market economies it monitors globally are projected to drop slightly this year to $135 billion, but go up to about $155 billion next year.

Investors and lenders are still treading very carefully when it comes to putting money into many emerging market economies because of the effects of financial crises. The head of the IIF, Charles Dallara, estimates that private banks alone lost more than $350 million in 1997 and 1998 due to the Asian and Latin American crises.

He said there is a high degree of turbulence in emerging markets generally because of the "substantial losses" resulting from the Russian and Asian crises. Russia effectively defaulted on a large amount of its debt to creditors last year, with the situation made all the worse by the dramatic decline in the value of the ruble against the dollar.

The institute did not issue specific country measurements or forecasts, but noted that for the Central/East European region, equity investment this year will remain at the same level as last year, and rise by about $3.5 billion in 2000. What has declined by more than half from 1998 to 1999, said the IIF, is lending by private banks and other creditors. That lending is expected to rise again by about 45 percent in 2000 if no other crises arise.

What is still hurting most emerging market countries, including those in Central and East Europe, is the outflow of local capital. The IIF says that these outflows should begin to ease and reverse as countries recover from the Asian and Russian crises.

The only thing that could dampen capital flows toward the end of this year, says the institute, is the fear -- to some degree self-fulfilling -- of the impact of the year 2000 computer problem. That may dampen capital flows for awhile because emerging markets are typically seen as more at risk than industrial country markets.