Why Latin America is missing out on the inflows
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CAPITAL MARKETS

Why Latin America is missing out on the inflows

With emerging markets as an asset class hotter than ever, it might be expected that capital flows to them would also be hitting all-time highs. Latin America, however, seems to have been left out of the party somewhat.

With emerging markets as an asset class hotter than ever, it might be expected that capital flows to them would also be hitting all-time highs. That would be the correct view of the aggregate situation: according to the Institute of International Finance, net private capital flows to emerging markets topped $500 billion in 2006 – the second year in succession that has happened. (In 2004, by contrast, those flows were a “mere” $350 billion.)

Latin America, however, seems to have been left out of the party somewhat. The region received net private capital flows of a healthy $71 billion in 2005 but that figure dropped sharply in 2006, to just $46 billion. In view of the fact that the public sector withdrew $20 billion from the region over the course of the year, in the form of repayments to the World Bank, IMF, and Inter-American Development Bank, it’s clear that Latin America’s healthy growth rates are not a result of a massive influx of foreign cash.

Indeed, a great deal of money appears to be flowing out of Latin America, not into it. The Brazilian government alone increased its foreign reserves – that is, purchased foreign securities, mainly Treasury bonds – to the tune of more than $31 billion in 2006, bringing the total to more than $84 billion.

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