Emerging markets could face trouble from fund inflows

Washington: The world's leading emerging markets that withstood the impact of the recent credit crisis in the US and Western markets could be the next trouble spot as huge private wealth flows into these countries are likely to create asset price inflation, said Josef Ackermann, chairman of Deutsche Bank AG and the chairman of the Institute of International Finance (IIF).

Speaking at a symposium during the 25th anniversary of the IIF, he said investors searching for a refuge from crisis-ridden markets in the West are pumping billion into emerging markets, raising the possibility for a bubble in these markets.

Emerging markets have largely been spared any major impact from the subprime and structured finance crisis that has shaken markets in the United States and Europe, according to a report released Sunday by the Institute of International Finance.

Assessment

The IIF said investment in Europe's emerging economies was set to surge ahead in 2007 to $276 billion, putting it ahead of emerging Asian econ-omies, which were poised to receive $208 billion, for the first time in recent years.

"The period immediately ahead [of the crisis] is fraught with risks for the global economy, risks that could spill over into emerging market finance," said William Rhodes, CEO of Citibank and first vice-chairman of the IIF.

"Investor faith in emerging markets, which may strengthen because of the resilience that has been displayed, could push asset prices up to unsustainable levels," Rhodes said. "Markets could overshoot, and when a correction comes, then there could be a hard landing."

"They have almost become a safe haven now and there is the risk of them developing asset bubbles," said IIF managing director Charles Dallara

Emerging markets are being favoured in part because "financial innovations are less common in developing countries".

Despite, the credit crisis, Ackermann said equity markets in the developed economies should remain strong as long as the macro impact isn't worse, referring to the financial turbulence in the subprime mortgage market and related structured finance.

IIF report: $620b pumpedin this year

According to IIF, capital flows into emerging markets will reach a record $620 billion this year compared to $572.8 billion in 2006. Flows will decline slightly in 2008 to $593.1 billion, due mostly to a decline in net lending by commercial banks forced to take on credits from some off-balance sheet vehicles such as conduits and structured investment vehicles.

"The recent global market turmoil has probably had its greatest fallout on the appetite and capacity of commercial banks to lend," the IIF said in a statement.