Capital flows pose challenge for developing countries

Accra, June 1, GNA - The World Bank (WB) has said net private capital flow to developing countries reached a record high of 491 billion dollars in 2005, driven by privatisations; mergers and acquisitions; external debt refinancing; as well as strong investor interest in local currency bond markets in Asia and Latin America. The WB in its annual 2006 Global Development Finance report made available to the Ghana News Agency in Accra on Thursday said the surging flows, including record bank lending and bond issuance, among other things, coincided with 6.4 per cent economic growth in the developing world in 2005, more than double the 2.8 per cent growth in developed countries.

Mr Fran=E7ois Bourguignon, World Bank Chief Economist and Senior Vice President for Development Economics; who was quoted in the Report, said: "These increased capital flows reflected greater confidence in the economic prospects of several developing countries. "Countries are benefiting from improved global conditions and investment climates, while closer global financial integration is posing difficult challenges to policymakers in both developed and developing countries to sustain economic growth and financial stability." The Report recognised that the sharp rise in private flows to developing countries came despite uncertainties caused by high oil prices, rising global interest rates and growing global payments imbalances.

Private debt flows to developing countries rose to an estimated 192 billion dollars, up from 85 billion dollars in 2003, driven by abundant global liquidity, steady improvement in developing countries' credit quality, lower yields in rich countries and expansion of investor interest in emerging market assets.

The Report said South-South trade rose to 562 billion dollars in 2004, up from 222 billion dollars in 1995, and in 2004 accounted for 26 per cent of developing countries' total trade.

South-South foreign direct investment (FDI) also rose, reaching 47 billion dollars in 2003, up from 14 billion dollars in 1995. In 2003, it accounted for 37 per cent of developing countries' total FDI. "While these South-South flows are a relatively small share of total private flows, they have the potential to change the face of development finance, particularly if growth in developing countries continues to outpace that in the developed countries."