The interest of foreign investors in India is growing substantially, yet foreign direct investment flows are well below potential, the IMF has said.
In Asia, FDI continued to rise in 2004, particularly in India, China, Indonesia, Malaysia and Vietnam and the trend is expected to continue in the emerging market countries in 2005, it said in its latest report on Global Financial Stability.
IMF had said that India has received much attention for its success as an outsourcing destination and is attracting large financial inflows (in 2004, it accounted for one-fourth of the portfolio flows to emerging Asia).
But FDI has been hindered in India by a difficult investment climate as well as by caps on FDI in certain sectors. And the growing inadequacy of India's infrastructure constitutes a major obstacle to private investment and export potential.
While China remains the predominant location for FDI inflows, the report said there are some tentative signs of a reallocation of FDI inflows within Asia. Some investors are reassessing their investment plans in China and the authorities are slowing down approvals in several overheated sectors. There is a decline of interest in large new investments -- into Malaysia and Singapore owing to higher local costs.
The report also noted that outward FDI from Asian emerging market countries is expanding rapidly. FDI flows from China, India, Korea, Malaysia, Singapore and Thailand are expanding rapidly and go beyond the well-publicized recent proposed large investments by Korea's //m.rediff.com/money/2005/aug/23posco.htm POSCO.
A higher level of FDI inflows to emerging market countries is expected to continue in 2005 owing to favourable economic prospects, cross-border acquisitions activity and further privatisation of state-owned companies, says the report. The investments are expected to concentrate in the oil and gas, telecommunications and banking sectors.
The World Bank projects FDI flows in 2005 as a whole to be above 2004. A number of large unannounced transactions are in the pipeline, including in the steel sector in India and privatisation in Turkey.
FDI has stayed largely within Asia except for those companies needing assured access to raw materials, the report said.
FDI flows from emerging market Asian companies are expected to continue expanding in the future, says the IMF.
"The slowing of domestic growth in some of the more mature Asian markets, coupled with the greater opportunities both within and outside the region is expected to fuel this growth."
In the larger economies of China and India, local companies will continue to want to secure natural resources -- often from the developing world -- to fuel their own growth.
In addition, many firms in emerging Asia see a number of competitive advantages in investing elsewhere in the region, including geographic proximity, cultural affinity, and the ability to operate in smaller niche markets."
Ample global liquidity and low yields in mature markets have encouraged investors to look to emerging markets in their quest for higher returns, says the IMF. In addition, many institutional investors have made strategic investments in emerging markets. As a result, emerging markets have become more resilient to market disturbances.
However, the positive global economic environment, especially in commodity-exporting countries, may mask some of the underlying vulnerabilities in emerging markets.
Emerging market countries, the IMF notes, have continued to build up cushions against adverse developments, including by accumulating additional reserves, and by early financing of external needs.
Furthermore, several countries have conducted debt management operations to reduce the vulnerability of their debt structures to external shocks by lowering the debt service costs and lengthening the average maturity of borrowing as well as by reducing currency exposure.
Near-term risks to financial stability are declining as credit quality improves and as an increasing number of emerging market commodity producers shift to net international creditor status, reflecting, in large part, the benefits of higher oil and other commodity prices.