Emerging markets face rising risks, warns IIF

[HenryTo]

Fits in quite well with my global economic slowdown scenario for the rest of this year. Like I have mentioned many times in our commentaries, emerging markets should be avoided at this point.
---------------------------------------------------------------------------
Emerging markets face rising risks, warns IIF
WASHINGTON, May 26 (Reuters) - Emerging markets are facing rising risks as the economic "sweet spot" of 2004 gives way to increasing global uncertainties, an international association of financial institutions warned on Thursday.
The Washington-based Institute of International Finance (IIF) said emerging markets were coming off a period of strong growth and high levels of liquidity that had sparked speculation in various markets, including commodities and housing.

Governments should renew their commitment to sound policies, while investors keep an eye on underlying risks as global growth slows, liquidity tightens and interest rates rise, it urged.

"We are entering into a period of greater risk and vulnerability in emerging markets, a period where prudent risks management will be imperative," said William Rhodes, IIF first vice chairman and senior vice chairman of Citigroup.

"I believe that lenders have to be especially careful at this time when it has become evident that emerging markets are set to face some new fresh challenges," he added.

Despite its warnings of risks, the IIF said left unchanged a March forecast for capital flows in 2005 that sees private flows to emerging markets reaching $311 billion.

This is slightly higher than the $300 billion recorded in 2004, some $90 billion up from 2003.

"I have seen this movie several times with different sub-titles," Rhodes noted.

Among the risks, the IIF said inflationary pressures in the United States were growing, with possible implications for the Federal Reserve's monetary policy course.

It said global current account imbalances were still largely unaddressed with the potential for pressure on exchange rates and interest rates.

Furthermore, uncertainties over the U.S. growth outlook have increased, prompting some market participants' concern about stagflation, the IIF said.

"History and experience tells us that it is precisely times such as these that prudent risk management is essential, with investors carefully differentiating between different types of risk and paying particular attention to underlying economic fundamentals," Rhodes cautioned.

He urged governments of emerging market economies not to become complacent about policies.

"These governments should renew their commitment to sound policies to safeguard and build on their progress," he said.

Meanwhile, a concerted effort was needed by wealthy industrial nations to strengthen the global economic environment, Rhodes said.