Eastern Europe is struggling to attract capital even as record-low interest rates in major economies force emerging nations in Asia and Latin America to fend off a flood of money from investors seeking higher yields. While Group of 20 policy makers are debating ways to prevent so-called hot money from creating asset bubbles in countries from China to Brazil, east European nations need capital to finance budget and trade deficits after receiving more than $100 billion of bailouts during the global recession. “The region still needs a lot of foreign capital,” said Neil Shearing, senior emerging markets economist at London-based Capital Economics. “Because of these higher financing requirements, for the most part the concern is not about excessive inflows but more deficient inflows.” Emerging Europe, including Turkey and Russia, will receive net private capital inflows of $182.3 billion this year, a fifth of the $825 billion forecast for all emerging markets, according to the Institute of International Finance, a Washington-based banking association. In 2007, before the global financial crisis, the region got $392.8 billion, 42 percent of the total for developing nations and more than Asia or Latin America. Financing requirements are the highest in the Baltic states, Balkans and Hungary, according to Capital Economics data. Hungary, Latvia, Romania, Serbia and Ukraine need inflows to finance their budget deficits as they prepare to wean themselves off international aid. “The countries that need the money the most are the ones with the biggest difficulty,” said Nigel Rendell, an emerging- markets economist at RBC Capital in London. “They’d like more money from overseas, but I’m not sure they are going to get a great deal more because it’s just too risky.” Financing Needs Gross external financing needs, a combination of the current account balance, short-term external debt and repayments due on longer-dated external debt, is the highest in Estonia, and Latvia, where it exceeds 50 percent of gross domestic product, according to Capital Economics. Bulgaria, Lithuania and Hungary follow with financing needs equal to 45 percent, 35 percent and 32 percent of GDP, respectively. The Czech Republic, Turkey and Poland are below the 20 percent mark, while Russia is the lowest at 4 percent. Turkey, where first-half growth approached that of China, and Poland, the only European Union member to escape recession last year, are most likely to attract capital flowing into eastern Europe, according to Capital Economics. Turkey, Poland Turkey has no plans for additional measures to stem capital inflows that have pushed the lira up 6.5 percent against the dollar this year, Central Bank Governor Durmus Yilmaz said Nov. 1. The bank left its benchmark interest rate at 7 percent for an 11th consecutive month Oct. 14 and has increased dollar purchases at auctions. Poland views the free-floating zloty as an “important instrument” in curbing capital inflows, central bank Governor Marek Belka said last month. The bank left its benchmark rate at a record-low 3.5 percent in October to fend off speculators. Russia is curbing demand for its currency and bonds without the capital restrictions imposed by countries in Asia and Latin America. Central bank Chairman Sergey Ignatiev is “quietly” manipulating the dollar-ruble rate while publicly loosening six- year-old controls of the exchange rate, according to VTB Capital and Otkritie Financial Corp. Currencies Trail East European nations are more able to absorb inflows than other emerging economies because their currencies have lagged behind those in other developing economies. Five of the six worst-performing emerging market currencies this year are in eastern Europe, led by the Hungarian forint’s 7.3 percent decline against the dollar, according to data compiled by Bloomberg. The Thai baht has led gains in emerging market currencies, advancing almost 12 percent this year. Brazil, whose Finance Minister Guido Mantega coined the phrase “currency war” Sept. 27, doubled a tax it charges foreigners on bond investments in an effort to curb speculative investments. Bank of Korea Governor Kim Choong Soo said last month that measures to mitigate capital flows could be “useful.” By contrast, Hungary needs a stronger currency to prevent people who borrowed in foreign currencies from defaulting, said Timothy Ash, global head of emerging-market research and strategy at Royal Bank of Scotland Group Plc. Hungary has the highest proportion of foreign-currency loans in the region. “It’s unusual for an emerging market that it needs currency appreciation,” Ash said. “Hungary is quite happy with all this.” To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

Source